Finance: A Selective Survey

Ever since the publication in 1565 of Girolamo Cardano's treatise on gambling, Liber de Ludo Aleae (The Book of Games of Chance), statistics and nancial markets have become inextricably linked. Over the past few decades many of these links have become part of the canon of modern nance, and it is now impossible to fully appreciate the workings of nancial markets without them. This selective survey covers three of the most important ideas of nance|e cient markets, the random walk hypothesis, and derivative pricing models|that illustrate the enormous research opportunities that lie at the intersection of nance and statistics. I am grateful to Samantha Arrington and Mark Becker for helpful comments. This research was partially supported by the MIT Laboratory for Financial Engineering and the National Science Foundation (Grant No. SBR{ 9709976). Harris & Harris Group Professor and director of the MIT Laboratory for Financial Engineering, MIT Sloan School of Management, 50 Memorial Drive, E52-432, Cambridge, MA 02142{1347, (617) 253{0920 (voice), (617) 258{5727 (fax), [email protected] (email).