Contemporary Finance

Preface

Finance is a noble discipline that has been pursued in something like its present form since the early Renaissance. It has been an integral part of the world’s emergence from privation over the past few centuries.

This book aims to help students and professionals understand today’s financial world. It tries to soften the distinction in university teaching between economics and finance, which may be useful in designing curricula but sets up a misleading dichotomy. Today, after the global financial crisis, the era of low interest rates that led up to it, Covid, and the inflation and banking turmoil that followed, monetary policy has changed drastically. It was always simplistic to think about how monetary policy works without reference to the financial system, but today it would entirely miss the point.

One goal of the book is to integrate what is needed to understand the crisis world we’ve experienced and the public policy responses it led to. To understand crises and capital regulation, for example, you need to understand credit risk and securitization, and to understand those, you need some option pricing theory and the CAPM. This book avoids treating risk analysis and management as a distinct specialization, somehow separate from the rest of finance. Economics and finance study one unitary world, risk analysis is embedded in all decision making, and you need insights from all these disciplines to make sense of things.

Another goal is to make some of these models more ...