New developments in financial economics

Abstract

Purpose This study aims to critically review recent contributions to the methodology of financial economics and discuss how they relate to one another and directions for further research. Design/methodology/approach A critical review of recent literature on new methodologies for financial economics. Findings Recent books have made important contributions to the study of financial economics. They suggest new approaches that include an emphasis on radical uncertainty, adaptive markets, agent-based modeling and narrative economics, as well as extensions of behavioral finance to include concepts such as diagnostic expectations. Many of these contributions can be seen more as complements than substitutes and provide fruitful directions for further research. Efficient markets can be seen as holding under particular circumstances. A major them of most of these contributions is that the study of financial crises and other aspects of financial economics requires the use of multiple theories and approaches. No one approach will be sufficient. Research limitations/implications There are great opportunities for further research in financial economics making use of these new approaches. Practical implications These recent contributions can be quite useful for improved analysis by researchers, private participants in the financial sector and macroeconomic and regulatory officials. Originality/value Provides an introduction to these new approaches and highlights fruitful areas for their extensions and applications.