Epistemological foundations for the assessment of risks in banking and finance


Journal of Economic Methodology

2014, vol. 21, n°2, pp.125-138

Departments: Finance, GREGHEC (CNRS)

Keywords: financial crises, causal process, forecasting, research program, risk

This article presents the epistemological and conceptual foundations on which current attempts to model crises and assess financial risks are based. It draws a distinction between two research programs, in Lakatos' sense: on the one hand, crises understood as structural events within a cycle; on the other hand, crises seen as statistical tail events. The methodological, theoretical and practical consequences of such a dichotomy are exposed. A crucial difference lies in the assumptions about change in the causal processes generating economic outcomes, especially asset returns. Furthermore, this article insists on providing conceptual definitions of key terms that have distinct meanings within the two research programs.