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From innovation to obfuscation: continuous time finance fifty years later

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  • Stylianos Perrakis

    (Concordia University)

Abstract

This paper surveys several of the most important applications of the continuous time finance paradigm in portfolio selection and derivatives pricing. While it recognizes the powerful insights that the paradigm offered to researchers and practitioners, it finds that several methodological approaches that it introduced have themselves hardened into paradigms and become dysfunctional. They have downgraded and neglected significant real-world problems because of their inability to model them, or adopted simplifications that had little relevance to the problems that they were supposed to solve. The paper then offers in all cases an alternative methodology that can reach the desired solution via rigorous economic and mathematical reasoning, by replacing mathematical elegance with numerical estimations and approximations.

Suggested Citation

  • Stylianos Perrakis, 2022. "From innovation to obfuscation: continuous time finance fifty years later," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(3), pages 369-401, September.
    • Handle: RePEc:kap:fmktpm:v:36:y:2022:i:3:d:10.1007_s11408-021-00399-z
    DOI: 10.1007/s11408-021-00399-z
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    Cited by:

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    More about this item

    Keywords

    Continuous time; Index options; No arbitrage; Stochastic dominance; Empirical option research;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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