ABSTRACT
The questions of how a financial system is organised and of why financial systems assume certain configurations are important topics for economic analysis, but they are questions which have not yet been examined extensively. Rather, financial theorists have focused on explaining various specialised aspects of financial system functions, and empiricists have applied their skills to testing such specialised explanations. Thus modern financial theory and the empirical studies based on it consider some financial system components in great detail, but leave others almost wholly unexamined. For example, many relations between securities prices are explained by arbitrage pricing theory, and a considerable number of such explanations are supported by data. On the other hand, speculative bubbles in securities prices, or enthusiasms for expanding certain lines of business at certain times, are much more controversial phenomena, and are currently much less satisfactorily explained. Yet these phenomena are also prominent features of modern financial systems.
