Not too long ago, theory in Finance seemed to have converged to a state of (self) complacency and inertia; fewer and fewer ground-breaking or even somewhat critical voices were heard and the academic discourse on finance and risk circled around mathematical nuances with often little regard to practice (Merton 2002). Even the Behavioural Finance stream with its stirring notion of ‘irrational markets’ did not seem so ‘irrational’ any more, in a true positivist fashion the quest for a refined theory to explain and predict the markets was agreed to be the remedy (McConnell, Bo¨cker, and Ong 2014). Yet the very practical failure to predict or handle the financial crisis, and even more the utter devastation that followed the (reluctantly gained) insight that the available instruments and formulas did not work in the setting of what many call a time of ‘VUCA’ – a time with heightened volatility, uncertainty, complexity and ambiguity (Bennett and Lemoine 2014). One example to illustrate would be the so called volatility paradox: despite heavy erratic trading and risk taking, volatility indices such as the volatility index (VIX) came back to an all-time low after an initial spike (Brunnermeier and Sannikov 2012), rendering the VIX almost useless in terms of investment guidance.
- Risk and Accounting Perspectives