We have written on the pros and cons of financial modelling. Today, we ponder about the role and importance of Financial Modelling in the financial landscape of today and tomorrow.
A financial model is more than mere lines of codes. It is a marriage of 3 disciplines – finance, mathematics and information technology. A good financial model is one which combines the 3 disciplines with sufficient adequacy. As business students, mathematics and information technology are admittedly our shortfalls. In the interest of time, detailed explanations of assumptions and derivations are often omitted. Consequently, there is a tendency to take them for granted and we fail to grasp their full implications. For example, the argument that beta is an appropriate proxy for a firm’s underlying business risk is centered on the efficient market hypothesis. Under the efficient market hypothesis, changes in fundamental business risk are reflected accurately in price changes. ......