Tuesday, October 4th, 2016
05:30 PM - 07:00 PM
Storrs Campus Laurel Hall 102
On the Role of Financial Innovation and Finance Science in Global Economic Growth and Development
A well-functioning financial system plays a critical role in economic growth and development. The sometimes-claimed dichotomy between the "real economy" and the "financial economy" is largely a fiction.
For nearly a half century, financial innovation has been a central force generally improving the global financial system with considerable economic benefit having accrued from those changes. During this same period, the field of finance underwent a remarkable transformation from a conceptual potpourri of anecdotes, rules of thumb, and manipulations of accounting data to a principles-based science, subjected to rigorous empirical examination and employing some of the most sophisticated mathematical models of uncertainty and optimization. The scientific breakthroughs in finance in this period both materially shaped, and were shaped by, the extraordinary innovations in finance practice.
Today no major financial institution in the world, including central banks, can function without the computer-based mathematical models of modern financial science and the myriad of derivative contracts and markets used to execute risk-transfer transactions as well as extract price- and risk-discovery information. In the aftermath of the financial crisis of 2008-9, however, the loss in trust in both the providers and regulators of financial services, in turn raised questions about efficacy of the changes in the financial system brought about by financial innovation and the mathematical models used to support it.
In this lecture, we explore the impact of financial innovation on the economy through a series of examplesâfrom the past, present and forecasts for the future. These examples will illustrate how financial innovation can materially impact the real-economy, both in terms of efficiency gains and environmental sustainability. They will demonstrate how crisis can induce implementation of financial innovations, which not only address the immediate challenges created by the crisis but also provide continuing, long-term benefits to the economy. We will show how financial innovation can improve implementation of important policy and regulatory objectives by removing unnecessary and unintended, dysfunctional economic "side effects" of those policies and regulations. We will discuss issues of what is a "good model" and the implication of âinherent opacityâ on the production and oversight of financial services in the future.
About the Speaker:
Robert C. Merton is School of Management Distinguished Professor of Finance at MIT Sloan School of Management and University Professor Emeritus at Harvard University. He was George Fisher Baker Professor of Business Administration (1988â98) and John and Natty McArthur University Professor (1998â2010) at Harvard Business School. He received a Ph.D. in Economics from MIT in 1970, then served on the finance faculty a