Integrated view

Key barriers to overcome are the artificial distinctions between asset pricing and strategic behaviour, as well as between macroeconomic stability and financial market behaviour. The conceptual approach and basis assumptions need to evolve. Asset pricing models assume perfect competition, efficient information processing and proper incentives of market participants. Corporate finance and banking models, though explicitly based on incentives and strategic behaviour, are too stylized and require explicit dynamic modelling. Both approaches fail to capture interactions across markets, missing a critical link with the macroeconomic cycle and financial stability. Financial behaviour, and in particular behavioural and incentive issues which affect risk choices, need to become incorporated in the macroeconomic approach.

An integrated view offers a richer description of financial interrelations, encouraging researchers working across fields to create and adopting, if not common, at least a compatible methodology. Methodological rigor based on oversimplifying assumptions on behaviour has clearly failed to capture the complexity of risk creation, and models used by researchers and practioneers need to evolve based on a broader, rigorous approach.

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