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Encyclopedia of Financial Models, 3 Volume Set by Frank J. Fabozzi

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Milestones in Financial Modeling

SERGIO M. FOCARDI, PhD

Partner, The Intertek Group

FRANK J. FABOZZI, PhD, CFA, CPA

Professor of Finance, EDHEC Business School

Abstract: The origins of financial modeling can be traced back to the development of mathematical equilibrium at the end of the nineteenth century, followed in the beginning of the twentieth century with the introduction of sophisticated mathematical tools for dealing with the uncertainty of prices and returns. In the 1950s and 1960s, financial modelers had tools for dealing with probabilistic models for describing markets, the principles of contingent claims analysis, an optimization framework for portfolio selection based on mean and variance of asset returns, and an equilibrium model for pricing capital assets. The 1970s ushered in models for pricing contingent claims and a new model for pricing capital assets based on arbitrage pricing. Consequently, by the end of the 1970s, the frameworks for financial modeling were well known. It was the advancement of computing power and refinements of the theories to take into account real-world markets starting in the 1980s that facilitated implementation and broader acceptance of mathematical modeling of financial decisions.

The mathematical development of present-day economic and finance theory began in Lausanne, Switzerland at the end of the nineteenth century, with the development of the mathematical equilibrium theory by Leon Walras (1874) and Vilfredo Pareto (1906). Shortly ...

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