When mentioned the theories of modern financial markets, it is necessary to introduce these 4 famous theories, "Portfolio Theory", "Capital Asset Pricing Model", "Efficient Market Hypothesis" and "Behavioral Finance Theory". One of the winners of the 1990 Nobel Prize in Economics, American economist Harry Markowitz first proposed "Portfolio Theory" in 1952.[2] The central issue of "Portfolio Theory" research is how rational investors choose to optimize their investment portfolios. The central issue of "Portfolio Theory" research is how rational investors choose to optimize their investment portfolios. For the first time, it accurately defines two fundamental concepts in investment management: risk and return. Since then, considering both risk and return has been an integral part of describing a reasonable investment objective. On the other hand, another winner of the 1990 Nobel Prize in Economics, William Sharpe, an American economist, developed the "Capital Asset Pricing Model" on the basis of "Portfolio Theory" in 1964.[3] Other economists such as John Lintner, Jack Treynor, and Jan Mossin had also proposed similar theories at that time. The focus of the "capital asset pricing model" research is to explore the quantitative relationship between risk asset returns and risk. It provides a model for measuring the amount of risk to help investors decide whether the additional returns they receive match the risks involved, which instructs investors how to allocate resources. The last winner of the 1990 Nobel Prize in Economics, Merton Miller, had collaborated with Eugene Fama in the 1970s. And Eugene Fama was the winner of the 2013 Nobel Prize in Economics, who put forward the "Efficient Markets Hypothesis."[4] This theory holds that in a stock market with sound laws, good functions, high transparency, and sufficient competition, all valuable information has been timely, accurately, and fully reflected in the stock price trend, including the current and future value of the enterprise, unless there is a market Manipulation, otherwise it is impossible for investors to obtain excess profits higher than the market average by analyzing past prices.[5] In other words, modern financial market itself is a portrayal of the national economy.[6]
Finally, modern financial market is continuing to evolve. The emergence of new technologies always drives new directions for financial markets. For instance, the blockchain technology in recent years may about changes in the transaction methods of modern financial markets.[14] Blockchain technology allows participants to reach consensus without the intervention of any third-party center, and solves the problem of reliable transmission of trust and value at a very low cost. Under the influence of the blockchain, the role of traditional financial transaction intermediaries such as banks has been weakened. Blockchain technology can be seen as a further attempt to avoid risks, but such attempts simultaneously amplify the advantages and disadvantages of modern financial markets.[15] Some financial market theories have been hit by new technologies. Scholars may have to reconsider modern financial market theories and the definition of market functions.
References
Journal articles
Awrey, D. (2012). Toward a Supply-Side Theory of Financial Innovation. SSRN Electronic Journal.
Berkman, H. (2012). The Capital Asset Pricing Model: A Revolutionary Idea in Finance!. Abacus, 49, pp.32-35.
Elliott, M., Golub, B. and Jackson, M. (2012). Financial Networks and Contagion. SSRN Electronic Journal.
Fama, E. (2014). Two Pillars of Asset Pricing. American Economic Review, 104(6), pp.1467-1485.
Hanson, S., Kashyap, A. and Stein, J. (2010). A Macroprudential Approach to Financial Regulation. SSRN Electronic Journal.
Jansson, W. (2018). Stock Markets, Banks and Economic Growth in the UK, 1850-1913. SSRN Electronic Journal.
Konzelmann, S., Wilkinson, F., Fovargue-Davies, M. and Sankey, D. (2009). Governance, Regulation and Financial Market Instability: The Implications for Policy. SSRN Electronic Journal.
Malkiel, B. (2003). The Efficient Market Hypothesis and Its Critics. Journal of Economic Perspectives, 17(1), pp.59-82.
Merton, R., Billio, M., Getmansky, M., Gray, D., Lo, A. and Pelizzon, L. (2013). On a New Approach for Analyzing and Managing Macrofinancial Risks (corrected). Financial Analysts Journal, 69(2), pp.22-33.
Phelps, E. (2010). Macroeconomics for a Modern Economy. Gospodarka Narodowa, 238(3), pp.79-109.
Philippon, T. and Reshef, A. (2013). An International Look at the Growth of Modern Finance. Journal of Economic Perspectives, 27(2), pp.73-96.
Reinhart, C. and Trebesch, C. (2016). The International Monetary Fund: 70 Years of Reinvention. Journal of Economic Perspectives, 30(1), pp.3-28.
Shiller, R. (2003). From Efficient Markets Theory to Behavioral Finance. Journal of Economic Perspectives, 17(1), pp.83-104.
Thaler, R. (2016). Behavioral Economics: Past, Present and Future. SSRN Electronic Journal.
Varian, H. (1993). A Portfolio of Nobel Laureates: Markowitz, Miller and Sharpe. Journal of Economic Perspectives, 7(1), pp.159-169.
[1] Reinhart, C. and Trebesch, C. (2016). The International Monetary Fund: 70 Years of Reinvention. Journal of Economic Perspectives, 30(1), pp.3-28.
[2] Varian, H. (1993). A Portfolio of Nobel Laureates: Markowitz, Miller and Sharpe. Journal of Economic Perspectives, 7(1), pp.159-169.
[3] Berkman, H. (2012). The Capital Asset Pricing Model: A Revolutionary Idea in Finance!. Abacus, 49, pp.32-35.
[4] Malkiel, B. (2003). The Efficient Market Hypothesis and Its Critics. Journal of Economic Perspectives, 17(1), pp.59-82.
[5] Fama, E. (2014). Two Pillars of Asset Pricing. American Economic Review, 104(6), pp.1467-1485.
[6] Konzelmann, S., Wilkinson, F., Fovargue-Davies, M. and Sankey, D. (2009). Governance, Regulation and Financial Market Instability: The Implications for Policy. SSRN Electronic Journal.
[7] Shiller, R. (2003). From Efficient Markets Theory to Behavioral Finance. Journal of Economic Perspectives, 17(1), pp.83-104.
[8] Thaler, R. (2016). Behavioral Economics: Past, Present and Future. SSRN Electronic Journal.
[9] Jansson, W. (2018). Stock Markets, Banks and Economic Growth in the UK, 1850-1913. SSRN Electronic Journal.
[10] Phelps, E. (2010). Macroeconomics for a Modern Economy. Gospodarka Narodowa, 238(3), pp.79-109.
[11] Philippon, T. and Reshef, A. (2013). An International Look at the Growth of Modern Finance. Journal of Economic Perspectives, 27(2), pp.73-96.
[12] Hanson, S., Kashyap, A. and Stein, J. (2010). A Macroprudential Approach to Financial Regulation. SSRN Electronic Journal.
[13] Merton, R., Billio, M., Getmansky, M., Gray, D., Lo, A. and Pelizzon, L. (2013). On a New Approach for Analyzing and Managing Macrofinancial Risks (corrected). Financial Analysts Journal, 69(2), pp.22-33.
[14] Awrey, D. (2012). Toward a Supply-Side Theory of Financial Innovation. SSRN Electronic Journal.
[15] Elliott, M., Golub, B. and Jackson, M. (2012). Financial Networks and Contagion. SSRN Electronic Journal.
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