The crisis and financial engineering

Abstract

In this article we review the financial market development which led to the 2007–2009 financial crisis. We argue that the crisis was not because of derivatives or financial engineering products but because of lack of proper regulatory framework despite the rapid innovations in technology and markets. We explain what has been lacking in the discipline of financial engineering which underlies the technological development and propose the augmentations necessary for the discipline. We finally point to areas where the financial engineering community can make contributions in formulating a new sustainable regulatory framework.