Financial Economics
- Equity premium puzzle: The Equity premium puzzle is thought to be one of the most important outstanding questions in the economic field. It is founded on the basis of that over the last one hundred years or so the average real return to stocks in the US has been substantially higher than that of bonds. The puzzle lies in the explaining the causes behind this equity premium. While there are a number of different theories regarding the puzzle, there still exists no definitive agreement on its cause.
- Dividend puzzle: The Dividend puzzle is the empirically observed phenomena that companies that pay dividends tend to be rewarded by investors with higher valuations. At present, there is no explanation widely accepted by economists. The Modigliani-Miller theorem suggests that the puzzle can (only) be explained by some combination of taxes, bankruptcy costs, market inefficiency (including that due to investor psychology), and asymmetric information.
- Improved Black–Scholes and Binomial Options Pricing models: The Black–Scholes model and the more general binomial options pricing models are a collection of equations that seek to model and price equity and call options. While the models are widely used, they have many significant limitations. Chief among them are the model's inability to account for historical market movements and their frequent overpricing of options, with the overpricing increasing with the time to maturity. The development of a model that can properly account for the pricing of call options on an asset with stochastic volatility is considered an open problem in financial economics.
Read more about this topic: List Of Unsolved Problems In Economics
Famous quotes containing the words financial and/or economics:
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An axiom from economics popular in the 1960s, the words have no known source, though have been dated to the 1840s, when they were used in saloons where snacks were offered to customers. Ascribed to an Italian immigrant outside Grand Central Station, New York, in Alistair Cooke’s America (epilogue, 1973)