Finance

Finance
Name	Finance
Type	Field
Established	Ancient
Major figures	John Maynard Keynes, Milton Friedman, Eugene Fama, Fisher Black, Myron Scholes, Robert Merton, Adam Smith, Joseph Stiglitz, Nicolas Barbon, Alexander Hamilton

Finance. Finance is the field concerned with allocation of funds, valuation of assets, management of risk, and intermediation among agents such as households, firms, and states, with methods developed across centuries of practice in markets, banks, and exchanges. Key developments trace through institutions like the Bank of England, events such as the Tulip mania and the South Sea Bubble, and theories by figures including John Maynard Keynes and Milton Friedman, which shaped modern policy and practice.

Overview

Finance encompasses activities performed by entities like Goldman Sachs, JPMorgan Chase, Federal Reserve System, and European Central Bank to raise capital, allocate capital, and price financial claims; it integrates approaches from researchers such as Eugene Fama, Fischer Black, and Myron Scholes to address problems in corporate action, portfolio choice, and market microstructure. Practitioners apply models originating in works by Adam Smith, David Ricardo, and later by Harry Markowitz, William Sharpe, and Robert Merton to inform decisions across settings including the New York Stock Exchange, London Stock Exchange, and Tokyo Stock Exchange.

History and Evolution

Early practices appear in records of Venice and the Medici family, while innovations such as double-entry bookkeeping spread through figures like Luca Pacioli and institutions like the Banco di Napoli. Episodes such as the Tulip mania and the South Sea Bubble prompted legal changes exemplified by statutes in the Kingdom of Great Britain and led to central banking innovations at the Bank of England; later shocks including the Great Depression, the 1973 oil crisis, and the 2008 financial crisis shaped regulatory frameworks like the Glass–Steagall Act and reforms influenced by policymakers such as Alexander Hamilton and economists like John Maynard Keynes. The 20th century saw formalization through theorems by Eugene Fama and models like Black–Scholes from Fischer Black and Myron Scholes, while the late 20th and early 21st centuries introduced electronic trading at venues such as NASDAQ and algorithmic strategies used by firms like Renaissance Technologies.

Major Subfields

Corporate finance studies decision-making in firms such as General Electric and Apple Inc. regarding capital structure, dividends, and acquisitions, drawing on agency theory advanced by scholars like Michael Jensen and William Meckling. Investment management examines portfolio theory and asset pricing with tools from Harry Markowitz, William Sharpe, and empirical tests by Eugene Fama applied at institutions like Vanguard and BlackRock. Public finance analyzes taxation and public debt issues as addressed by policymakers in bodies such as the International Monetary Fund and World Bank, while personal finance focuses on household savings and mortgages exemplified by products from Wells Fargo and Bank of America.

Financial Instruments and Markets

Securities traded on exchanges like the New York Stock Exchange and NASDAQ include equities issued by firms such as Microsoft Corporation, bonds issued by sovereigns like United States Department of the Treasury and corporates like Toyota, and derivatives standardized on platforms such as the Chicago Board Options Exchange and over-the-counter contracts used by banks like Deutsche Bank. Instruments such as options and futures derive pricing theory from work by Fischer Black, Myron Scholes, and Robert Merton, while fixed-income valuation builds on contributions from John Hull and practitioners at firms like PIMCO. Foreign exchange markets linking currencies like the U.S. dollar, Euro, and Japanese yen operate through networks of dealers and platforms such as EBS and Reuters.

Institutions and Regulation

Regulatory architecture features central banks like the Federal Reserve System, supranational bodies like the European Central Bank, and supervisory agencies such as the Securities and Exchange Commission and the Financial Conduct Authority, which enforce rules shaped by legislation including the Dodd–Frank Wall Street Reform and Consumer Protection Act and the Basel Accords. Commercial and investment banks like Citigroup and Morgan Stanley, insurance companies like AIG, and ratings agencies such as Moody's Investors Service and Standard & Poor's form the infrastructure of intermediation, while exchanges including the London Stock Exchange Group and clearinghouses including LCH.Clearnet manage settlement and counterparty risk.

Risk Management and Valuation

Risk management employs quantitative techniques from value-at-risk frameworks developed at institutions such as JPMorgan Chase and theoretical models from scholars like Robert Merton, incorporating stress-testing used by regulators such as the European Banking Authority; valuation methods draw on discounted cash flow approaches taught in texts by authors like Aswath Damodaran and option pricing introduced by Fischer Black and Myron Scholes. Credit risk assessment uses models implemented by firms like Moody's and Fitch Ratings, while market risk and liquidity risk are monitored by central banks including the Bank of England and regulatory bodies like the Office of the Comptroller of the Currency.

Behavioral and International Perspectives

Behavioral finance integrates findings from psychologists such as Daniel Kahneman and Amos Tversky with anomalies documented by Richard Thaler and empirical studies by Robert Shiller to explain phenomena at institutions like Nasdaq and episodes such as the Dot-com bubble. International finance studies currency regimes, capital flows, and crises exemplified by the Bretton Woods Conference, the Mexican peso crisis, and the Asian financial crisis, with policy analysis by entities including the International Monetary Fund and academics like Paul Krugman.

Category:Finance