Ebook: Handbook of the Economics of Finance

Financial economics applies the techniques of economic analysis to understand the savings and investment decisions by individuals, the investment, financing and payout decisions by firms, the level and properties of interest rates and prices of financial assets and derivatives, and the economic role of financial intermediaries. Until the 1950s, finance was viewed primarily as the study of financial institutional detail and was hardly accorded the status of a mainstream field of economics. This perception was epitomized by the difficulty Harry Markowitz had in receiving a PhD degree in the economics department at the University of Chicago for work that eventually would earn him a Nobel prize in economic science. This state of affairs changed in the second half of the 20th century with a revolution that took place from the 1950s to the early 1970s. At that time, key progress was made in understanding the financial decisions of individuals and firms and their implications for the pricing of common stocks, debt, and interest rates.