Inverse Problems in Finance

Inverse problems in finance involve determining the underlying factors or parameters that lead to observed market behaviors or asset prices. Essentially, instead of predicting future prices, one seeks to deduce the hidden variables or models that produced the current data. For instance, while one might see a stock's price movement, the inverse problem asks what economic conditions, investor sentiments, or risk factors caused those movements. This approach helps analysts fine-tune models for better forecasting, assess risks, and make informed investment decisions by working backward from what is observable to uncover the driving elements.