Start:Main Column

Teruo Nakatsuma, Professor, Faculty of Economics

Unraveling the increasingly complex financial market using Bayes' theorem

We study finance theories and the application of these theories. The mission of my seminar class is to nurture students with highly advanced knowledge in practical finance so as to contribute to society.

Prof. Teruo Nakatsuma and students

Financial crises such as Lehman Shock and the EU credit crisis have been occurring one after another around the world. And every time a crisis is repeated, stock prices and exchange rates become volatile, which has a negative impact not only on financial institutions but also on private companies and household economy. In order to deal with such difficult financial markets, an advanced knowledge of finance is essential.

Finance as a field of academics involves researching methods to solve various issues concerning investment and funding at financial institutions and private companies. As you may already know, the holding of assets such as stocks and bonds is always associated with a risk of extreme volatility of market prices. Therefore, financial institutions, asset management companies, and pension funds must generate revenue while controlling the risk that the market value of their assets may suffer losses. One of the main roles of finance as a field of academics is to offer necessary tools for this purpose.

On the other hand, looking into private businesses, it is very important for a business owner to decide on which business to invest in (a factory, plant, retail outlet, or business subject to M&A) and financing methods for such investments (increasing capital, issuing bonds, etc.). In such circumstances, one is required to finance the business efficiently and to make smart investment decisions, while balancing business profitability and risk of failure. Measures to support decision-making for business investments and financing are also what we study in finance.

In practical financial operations, one is constantly required to make decisions under uncertainty, but this is where Bayes' theorem, my field of expertise, becomes effective. Unlike conventional statistical theories in which we can only use historical data, in Bayes’ theorem, we can use the subjective judgement of the decision maker. Therefore, additional information often overlooked when only considering past data can be picked up and used for decision-making. Also, another advantage is that we can handle various uncertainties surrounding the financial market in a comprehensive manner. I hope that Bayes’ theorem will be more widely used in practical finance to contribute to stabilization of the financial market.

Student's Voice
Youhei Tohi, Third-year Student,
Faculty of Economics

The perfect environment for studying finance

Professor Nakatsuma’s seminar class makes its objective to produce university graduates immediately ready to take on the world of business. Though our classes centered around finance theory and programming exercises, we also study risk hedging using derivatives, designing optimum portfolios, and business valuation methods in relation with M&A, according to each student’s interests. When writing our graduation theses and papers for Mita-sai (Mita Festival), we receive ample help from both Professor Nakatsuma and graduate students, who kindly answer our rudimentary questions. In this way, we complete our theses as if in a desperate game of catch-up with our seniors and mentors. Additionally, Professor Nakatsuma invites former seminar graduates who play active roles in various fields to give lectures on a regular basis in order to deepen our exchanges with them and learn about their practical business affairs.

*This article appeared in the 2012 autumn edition (No.276) of “Juku.”
*Position titles, etc., are those at the time of publishing.