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Financial History and financial economics
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                                                                                                                                                                                             QUCEH WORKING PAPER SERIES http://www.quceh.org.uk/working-papers FINANCIAL HISTORY AND FINANCIAL ECONOMICS John D. Turner (Queen’s University Belfast)  Working Paper 14-03 QUEEN’S UNIVERSITY CENTRE FOR ECONOMIC HISTORY   Queen’s University Belfast 185 Stranmillis Road Belfast BT9 5EE April 2014    1 Financial History and Financial Economics* #   John D. Turner Queen’s University Belfast Abstract This essay looks at the bidirectional relationship between financial history and financial economics. It begins by giving a brief history of financial economics by outlining the main topics of interest to financial economists. It then documents and explains the increasing influence of financial economics upon financial history, and warns of the dangers of applying financial economics unthinkingly to the study of financial history. The essay proceeds to highlight the many insights that financial history can potentially provide to financial economics. The main conclusion of the essay is that financial economics can potentially learn more from financial history than vice versa. Keywords:  financial economics, financial history, asset pricing, agency, corporate finance,  behavioural finance, options. JEL Classification: G00, N01, N20.   * Essay prepared for Oxford Handbook of Banking and Financial History , Y. Cassis, R. S. Grossman and C. Schenk (editors). Oxford: Oxford University Press (forthcoming). # Thanks to Graham Brownlow, Gareth Campbell, Chris Colvin, and Qing Ye for their comments and suggestions.      2 Robert Solow, the Nobel laureate, once opined that “an economic historian is merely an economist with a high tolerance for dust”. 1  In making this statement, Solow was railing against the cliometric revolution, and was arguing that economic history needed to be much more than merely testing economic theories using thin data. In a similar vein, I will make a  plea in this essay that the financial historian should not merely be a financial economist with a high tolerance for dust and data entry. The main purpose of this essay is to analyse the bidirectional relationship between financial history and financial economics because, as we will see below, they both have something to contribute to each other. In order to analyse this bidirectional relationship, we will critically examine how financial economics has affected and been used in financial history. Some suggestions as to potential future uses of financial economics in financial history will also be made. We will then explore the contributions that financial history has made and can make in the future to financial economics. The main argument that is developed in this essay is that financial history has more to offer financial economics than vice versa. Financial economics, as a discipline, is closely related to, but sits somewhat separately from, the academic study of banking and financial intermediation. Banking theory has largely been developed by economists interested in industrial organization and the macroeconomy. 2  This essay will adhere to this strict subject delineation and will therefore not be analysing the relationship between banking theory and banking history. The first section of this essay is a condensed history of financial economics, where the three foundational pillars of the discipline are identified and discussed, namely asset pricing, corporate finance, and the efficient markets hypothesis. The subsequent most important 1   Solow, “Economic History”, p. 331.   2  See, for example, Freixas and Rochet,  Microeconomics of Banking .

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Jul 23, 2017
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