The Fundamental Theory of Asset Pricing Within the field of Financial Mathematics, the Fundamental Theorem of Asset Pricing consists of two statements, (e.g. [Shreve, 2004, Section 5.4]) Theorem: The Fundamental Theorem of Asset Pricing 1. The use of the term ‘probability measure’ places the Fundamental Theory within the mathematical theory of probability formulated by Andrei Kolmogorov in 1933 ([Kolmogorov, 1933 (1956)]). It is important to realise the fundamental position of probability in science. The significance of probability in providing the basis of statistical inference in empirical science had been generally understood since Laplace. Two mathematical theories had become ascendant by the late 1920s. To balance von Mises’ Realism, the Italian actuary, Bruno de Finetti presented a more Nominalist approach. While von Mises and de Finetti took an empirical path, Kolmogorov used mathematical reasoning to define probability. Kolmogorov’s work was initially well received, but slow to be adopted.
Priceonomics Blog The orthodox New Keynesian position on liquidity preference and loanable funds I am not an orthodox New Keynesian macroeconomist (ONKM), but I can pretend to be one. Q: What determines the rate of interest? ONKM: "The central bank sets the rate of interest." Discussion: the above answer is a pure liquidity preference theory of the rate of interest. Q: But what determines where the central bank chooses to set the rate of interest? ONKM: "Loanable funds." Discussion: this is the bit that needs some explanation. ONKM: "The central bank chooses to set the rate of interest that it believes is compatible with keeping output at potential and inflation on target." So we need to translate that answer into loanable funds language: Let output demanded (call it Yd) be a negative function of the rate of interest r, a positive function of actual income Y, and a function of other stuff X. Yd = D(r,Y,X) And the ONKM central bank wants to set r such that output demanded equals potential output Y*, so that: D(r,Y*,X) = Y* Id(r,Y*,X) = Sd(r,Y*,X) This post is about Lars Syll's views. P.S.
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