Epistemic Limits of Empirical Finance: Causal Reductionism and Self-Reference
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| Format: | Preprint |
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2023
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| _version_ | 1866909014970859520 |
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| author | Polakow, Daniel Gebbie, Tim Flint, Emlyn |
| author_facet | Polakow, Daniel Gebbie, Tim Flint, Emlyn |
| contents | The clarion call for causal reduction in the study of capital markets is intensifying. However, in self-referencing and open systems such as capital markets, the idea of unidirectional causation (if applicable) may be limiting at best, and unstable or fallacious at worst. In this work, we critically assess the use of scientific deduction and causal inference within the study of empirical finance and financial econometrics. We then demonstrate the idea of competing causal chains using a toy model adapted from ecological predator/prey relationships. From this, we develop the alternative view that the study of empirical finance, and the risks contained therein, may be better appreciated once we admit that our current arsenal of quantitative finance tools may be limited to ex post causal inference under popular assumptions. Where these assumptions are challenged, for example in a recognizable reflexive context, the prescription of unidirectional causation proves deeply problematic. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2311_16570 |
| institution | arXiv |
| publishDate | 2023 |
| record_format | arxiv |
| spellingShingle | Epistemic Limits of Empirical Finance: Causal Reductionism and Self-Reference Polakow, Daniel Gebbie, Tim Flint, Emlyn General Finance General Economics Economics Adaptation and Self-Organizing Systems 91B28 J.4 The clarion call for causal reduction in the study of capital markets is intensifying. However, in self-referencing and open systems such as capital markets, the idea of unidirectional causation (if applicable) may be limiting at best, and unstable or fallacious at worst. In this work, we critically assess the use of scientific deduction and causal inference within the study of empirical finance and financial econometrics. We then demonstrate the idea of competing causal chains using a toy model adapted from ecological predator/prey relationships. From this, we develop the alternative view that the study of empirical finance, and the risks contained therein, may be better appreciated once we admit that our current arsenal of quantitative finance tools may be limited to ex post causal inference under popular assumptions. Where these assumptions are challenged, for example in a recognizable reflexive context, the prescription of unidirectional causation proves deeply problematic. |
| title | Epistemic Limits of Empirical Finance: Causal Reductionism and Self-Reference |
| topic | General Finance General Economics Economics Adaptation and Self-Organizing Systems 91B28 J.4 |
| url | https://arxiv.org/abs/2311.16570 |