Finance and Econometrics, Introduction to

Introduction

Economics and finance have slowly emerged from the Walrasian, representative agent paradigm exemplified by the research agenda in general equilibrium theory. This program may have reached its pinnacle in the 1970s, with a highly abstract treatment of the existence of a market clearing mechanism. The normative foundation of this research was provided by powerful welfare theorems that demonstrated the optimality of the market allocations. Unfortunately, this abstract world had little economics in it. The models rarely provided empirical implications. Lifetime consumption and portfolio allocation plans were formed in infancy, unemployment was Pareto optimal, and the role for government was largely limited to public goods provision.

The demonstration by Benhabib, Brock, Day, Gale, Grandmont, [1,4,8,9] and others, that even simple mathematical models could display highly complex dynamics was the beginning of a new research program...