On the epistemic contribution of financial models

Abstract

ABSTRACT Financial modelling is an essential tool for studying the possibility of financial transactions. This paper argues that financial models are conventional tools widely used in formulating and establishing possibility claims about a prospective investment transaction, from a set of governing possibility assumptions. What is distinctive about financial models is that they articulate how a transaction possibly could occur in a non-actual investment scenario given a limited base of possibility conditions assumed in the model. For this reason, it is argued that the epistemic contribution of financial models is that of enabling the model users to envision exactly how a prospective investment could be achieved in various ways through a detailed understanding of the available transaction mechanisms. Thus, financial models provide information about the possibility of an investment scenario by showing how a specific transaction mechanism could result from a small set of initial possibility conditions assumed in the model.