Frictions in Finance: Theory and Evidence
Classical financial theory is based on the paradigm of frictionless markets. By ruling out "flaws and frictions'' such as transaction costs, heterogeneous beliefs, or asymmetric information, many elegant and far-reaching results can be derived. Yet, the question remains whether such "market imperfections'' can indeed be safely assumed away without affecting the theory's broad conclusions.
In recent years, more and more theoretical and empirical evidence has accumulated that "frictions are central in many parts of economics'', and help provide "explanations of a wide range of phenomena concerning asset prices, monetary policy, and corporate finance'' (Pedersen, 2010). However, as John Cochrane, the 2010 President of the American Finance Association recently put it (Cochrane, 2011): "the problem is that we don't have enough math. [...] Frictions are just hard with the tools we have right now''.
In recent years, researchers working on control theory, optimal transport, stochastic processes, and numerical analysis have developed powerful new tools that have the potential to bring the analysis of traditionally intractable models within reach. However, most of these techniques have not disseminated into the finance community yet. Conversely, many crucial new modelling paradigms, stylised facts and econometric results from empirical and theoretical finance are not widely known in the mathematical community.
The goal of this workshop - organized with support from Imperial's Quantitative Sciences Research Institute - is to create new synergies in the analysis of financial frictions by bringing together leading researchers from mathematics and finance and laying the groundwork for future collaborations. The workshop will also create a platform for junior researchers in these fields to be exposed to cutting-edge problems and techniques.