Intermediate Financial Theory

Most topics in a first year Ph.D. course in financial economics are considered via examples and intuitive arguments rather than using the full generality of propositions and proofs. This text uses general equilibrium theory as a basis for understanding and unifying more difficult literature.

Features

• A concise, rigorous, yet accessible review of the main ideas of modern financial theory—Such as MPT in Chapter 5, CAPM in Chapter 6, APT in Chapter 12, and EMH in Chapter 14.
• A glance into new developments and ideas that are likely to shape future financial practice and thinking—Such as Arrow-Debreu pricing in Chapter 7, risk neutral pricing in Chapters 9 and 11, CCAPM in Chapter 10, market incompleteness in Chapter 13, and differential information in Chapter 14.
• • Gives students insight into the process of decision making.
• A unifying view on several different strands of the literature on the basis of general equilibrium theory—Careful coverage of the idea of A-D pricing permits not only stating in an easy way the notion of a martingale measure (Chapter 9), but also making useful connections with APT (Chapter 14) and CCAPM (10).
• • Allows the student to see the interrelatedness of topics.
• Broader considerations than the narrow financial return objectives traditionally emphasized—Such as concerns for social welfare, risk-sharing, and economic growth.
• • Exposes students to other perspectives (policy makers in particular) they are likely to encounter in the course of their professional careers.

• 1. On the Role of Financial Markets and Institutions.
• 2. Making Choices in Risky Situations.
• 3. Measuring Risk and Risk Aversion.
• 4. Risk Aversion and Investment Decisions (Part I).
• 5. Risk Aversion and Investment Decisions, Part II: Modern Portfolio Theory.
• 6. The Capital Asset Pricing Model: Another View about Risk.
• 7. Arrow Debreu Pricing.
• 8. Options and Market Completeness.
• 9. The Martingale Measure in Discrete Time: Part I.
• 10. The Consumption Capital Asset Pricing Model.
• 11. The Martingale Measure in Discrete Time: Part II.
• 12. The Arbitrage Pricing Theory.
• 13. Financial Structure and Firm Valuation in Incomplete Markets.
• 14. Financial Equilibrium with Differential Information.