The Rise and Fall of Neoclassical Finance
The principles of neoclassical finance can be rationalized in terms of classical game theory, which reduces human behaviour to pure mathematics. The neoclassical finance era started in the early 1950s with the work of Harry Markowitz on portfolio optimization theory, followed by the work of Modigliani and Miller on capital structure and the work of Sharpe and Lintner on asset pricing models, including the CAPM, and the development of the efficient market hypothesis by Eugene Fama. While the principles of neoclassical finance, as the mainstream school of thought, were at one time unquestionable, some market events pose a challenge to the soundness of these principles, particularly the propositions that market prices reflect the intrinsic values of the underlying assets.
KeywordsNeoclassical finance CAPM Efficient market hypothesis Capital structure
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