Finance Theory and Asset Pricing

Finance Theory and Asset Pricing

Finance Theory and Asset Pricing

Finance Theory and Asset Pricing

Synopsis

This book provides a concise guide to financial asset pricing theory. Assuming a basic knowledge of graduate microeconomic theory, it explores the fundamental ideas that underlie competitive financial asset pricing models with symmetric information. Using finite dimensional techniques, this book avoids sophisticated mathematics and exploits economic theory to clarify the essential structure of recent research in asset pricing. In particular it explores arbitrage pricing models with and without diversification, Martingale pricing methods, representative agent pricing models; discusses these ideas in two date and multi-date models; and provides a range of examples from the literature.

Excerpt

This book is based on a set of lectures that I gave at the Institute of Advanced Studies in Vienna in 1992, and subsequently taught in the Economics Department, Queen's University. My brief was to provide a series of ten lectures that surveyed and introduced recent asset-pricing models in Finance, using mathematical techniques and microeconomic theory at the level of Varian Microeconomic Analysis, or Kreps A Course in Microeconomic Theory. With these prerequisites the book should be accessible to any first-year graduate student who has a good grounding in microeconomics. Necessarily this book is not complete, and omits much that is important in terms of generality and detail. To make the book complete in that sense would triple its length and increase the level of mathematical difficulty substantially.

The first chapter provides a brief history of modern finance theory, emphasizing the main contributions and sketching the role of application in the development of the theory. Chapter 2 introduces the two-date model with complete markets and uncertainty. The chapter recalls standard microeconomic arguments and introduces some of the geometric arguments that are developed more fully later in the book. Chapter 3 generalizes the model by allowing for incomplete markets and non-trivial asset markets. In Chapter 4 the incomplete market economy equilibrium is analysed using the idea of induced preferences and production sets over assets. This idea allows us to construct geometric proofs of arbitrage results and relate them to familiar microeconomic theoretical arguments. The Modigliani-Miller arguments on capital structure and the . . .

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