An Engine, Not a Camera: How Financial Models Shape Markets (Google eBook)

Front Cover
MIT Press, Aug 29, 2008 - Technology & Engineering - 392 pages
2 Reviews
In An Engine, Not a Camera, Donald MacKenzie argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical models of markets, were not simply external analyses but intrinsic parts of economic processes. Paraphrasing Milton Friedman, MacKenzie says that economic models are an engine of inquiry rather than a camera to reproduce empirical facts. More than that, the emergence of an authoritative theory of financial markets altered those markets fundamentally. For example, in 1970, there was almost no trading in financial derivatives such as "futures." By June of 2004, derivatives contracts totaling $273 trillion were outstanding worldwide. MacKenzie suggests that this growth could never have happened without the development of theories that gave derivatives legitimacy and explained their complexities. MacKenzie examines the role played by finance theory in the two most serious crises to hit the world's financial markets in recent years: the stock market crash of 1987 and the market turmoil that engulfed the hedge fund Long-Term Capital Management in 1998. He also looks at finance theory that is somewhat beyond the mainstream -- chaos theorist Benoit Mandelbrot's model of "wild" randomness. MacKenzie's pioneering work in the social studies of finance will interest anyone who wants to understand how America's financial markets have grown into their current form.
  

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Review: An Engine, Not a Camera: How Financial Models Shape Markets

User Review  - John Farr - Goodreads

This is a wonderfully informative book on the history and sociology of financial theory. The author shows a great command of the subject matter, which I found impressive as he is a sociologist by ... Read full review

Review: An Engine, Not a Camera: How Financial Models Shape Markets

User Review  - Taylor - Goodreads

a canonical, must-read in the social studies of finance. Read full review

Contents

1 Performing Theory?
1
2 Transforming Finance
37
3 Theory and Practice
69
4 Tests Anomalies and Monsters
89
5 Pricing Options
119
6 Pits Bodies and Theorems
143
7 The Fall
179
8 Arbitrage
211
Appendix D The BlackScholes Equation for a European Option on a Non DividendBearing Stock
283
Appendix E Pricing Options in a Binomial World
285
Appendix F Repo Haircuts and Reverse Repo
289
Appendix G A Typical SwapSpread Arbitrage Trade
291
Appendix H List of Interviewees
293
Glossary
297
Notes
303
Sources of Unpublished Documents
331

9 Models and Markets
243
Appendix A An Example of Modigliani and Millers Arbitrage Proof of the Irrelevance of Capital Structure to Total Market Value
277
Appendix B Lévy Distributions
279
Appendix C Sprenkles and Kassoufs Equations for Warrant Prices
281
References
333
Series List
369
Index
371
Copyright

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About the author (2008)

Donald MacKenzie is Professor of Sociology (Personal Chair) at the University of Edinburgh. His books include "Inventing Accuracy" (1990), "Knowing Machines" (1996), and "Mechanizing Proof" (2001), all published by the MIT Press. Portions of "An Engine, not a Camera" won the Viviana A. Zelizer Prize in economic sociology from the American Sociological Association.

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