Abstract
As it is often the case in history, what is now considered conventional started off as a revolution. Economics is no exception. The revolution began in the early 1970s, especially in the work of Robert Lucas (Nobel Prize winner in 1995) at the University of Chicago, and its name was New Classical Economics.
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Notes
- 1.
Building on the minimum variance approach, in the theory developed by Markowitz, the investor maximizes a utility function, which is given by expected return, variance, and a new parameter, measuring absolute risk aversion. The parameter of absolute risk aversion is assumed to be positive, because all investors are assumed to be risk-averse. A negative value would imply that an investor is risk-loving.
- 2.
In a CDS, flows are similar to those implied by insurance contracts. Counterparty A pays to Counterparty B on a regular basis an amount X. In case the credit entity of interest defaults, Counterparty B pays to Counterparty A a predetermined lump sum and the swap ends.
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Ghisellini, F., Chang, B.Y. (2018). Does Conventional Economics Fit Reality?. In: Behavioral Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-75205-1_2
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DOI: https://doi.org/10.1007/978-3-319-75205-1_2
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