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| Preface | |
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| Single-Period Portfolio Choice and Asset Pricing | |
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| Expected Utility and Risk Aversion | |
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| Preferences When Returns Are Uncertain | |
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| Risk Aversion and Risk Premia | |
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| Risk Aversion and Portfolio Choice | |
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| Summary | |
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| Exercises | |
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| Mean-Variance Analysis | |
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| Assumptions on Preferences and Asset Returns | |
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| Investor Indifference Relations | |
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| The Efficient Frontier | |
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| A Simple Example | |
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| Mathematics of the Efficient Frontier | |
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| Portfolio Separation | |
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| The Efficient Frontier with a Riskless Asset | |
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| An Example with Negative Exponential Utility | |
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| An Application to Cross-Hedging | |
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| Summary | |
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| Exercises | |
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| CAPM, Arbitrage, and Linear Factor Models | |
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| The Capital Asset Pricing Model | |
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| Characteristics of the Tangency Portfolio | |
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| Market Equilibrium | |
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| Arbitrage | |
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| Examples of Arbitrage Pricing | |
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| Linear Factor Models | |
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| Summary | |
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| Exercises | |
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| Consumption-Savings Decisions and State Pricing | |
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| Consumption and Portfolio Choices | |
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| An Asset Pricing Interpretation | |
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| Real versus Nominal Returns | |
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| Risk Premia and the Marginal Utility of Consumption | |
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| The Relationship to CAPM | |
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| Bounds on Risk Premia | |
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| Market Completeness, Arbitrage, and State Pricing | |
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| Complete Markets Assumptions | |
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| Arbitrage and State Prices | |
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| Risk-Neutral Probabilities | |
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| State Pricing Extensions | |
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| Summary | |
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| Exercises | |
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| Multiperiod Consumption, Portfolio Choice, and Asset Pricing | |
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| A Multiperiod Discrete-Time Model of Consumption and Portfolio Choice | |
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| Assumptions and Notation of the Model | |
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| Preferences | |
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| The Dynamics of Wealth | |
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| Solving the Multiperiod Model | |
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| The Final Period Solution | |
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| Deriving the Bellman Equation | |
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| The General Solution | |
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| Example Using Log Utility | |
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| Summary | |
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| Exercises | |
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| Multiperiod Market Equilibrium | |
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| Asset Pricing in the Multiperiod Model | |
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| The Multiperiod Pricing Kernel | |
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| The Lucas Model of Asset Pricing | |
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| Including Dividends in Asset Returns | |
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| Equating Dividends to Consumption | |
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| Asset Pricing Examples | |
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| A Lucas Model with Labor Income | |
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| Rational Asset Price Bubbles | |
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| Examples of Bubble Solutions | |
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| The Likelihood of Rational Bubbles | |
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| Summary | |
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| Exercises | |
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| Contingent Claims Pricing | |
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| Basics of Derivative Pricing | |
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| Forward and Option Contracts | |
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| Forward Contracts on Assets Paying Dividends | |
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| Basic Characteristics of Option Prices | |
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| Binomial Option Pricing | |
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| Valuing a One-Period Option | |
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| Valuing a Multiperiod Option | |
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| Binomial Model Applications | |
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| Calibrating the Model | |
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| Valuing an American Option | |
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| Options on Dividend-Paying Assets | |
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| Summary | |
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| Exercises | |
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| Essentials of Diffusion Processes and Ito's Lemma | |
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| Pure Brownian Motion | |
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| The Continuous-Time Limit | |
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| Diffusion Processes | |
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| Definition of an Ito Integral | |
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| Functions of Continuous-Time Processes and Ito's Lemma | |
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| Geometric Brownian Motion | |
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| Kolmogorov Equation | |
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| Multivariate Diffusions and Ito's Lemma | |
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| Summary | |
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| Exercises | |
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| Dynamic Hedging and PDE Valuation | |
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| Black-Scholes Option Pricing | |
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| Portfolio Dynamics in Continuous Time | |
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| Black-Scholes Model Assumptions | |
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| The Hedge Portfolio | |
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| No-Arbitrage Implies a PDE | |
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| An Equilibrium Term Structure Model | |
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| A Bond Risk Premium | |
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| Characteristics of Bond Prices | |
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| Option Pricing with Random Interest Rates | |
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| Summary | |
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| Exercises | |
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| Arbitrage, Martingales, and Pricing Kernels | |
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| Arbitrage and Martingales | |
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| A Change in Probability: Girsanov's Theorem | |
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| Money Market Deflator | |
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| Feynman-Kac Solution | |
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| Arbitrage and Pricing Kernels | |
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| Linking the Valuation Methods | |
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| The Multivariate Case | |
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| Alternative Price Deflators | |
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| Applications | |
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| Continuous Dividends | |
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| The Term Structure Revisited | |
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| Summary | |
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| Exercises | |
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| Mixing Diffusion and Jump Processes | |
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| Modeling Jumps in Continuous Time | |
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| Ito's Lemma for Jump-Diffusion Processes | |
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| Valuing Contingent Claims | |
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| An Imperfect Hedge | |
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| Diversifiable Jump Risk | |
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| Lognormal Jump Proportions | |
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| Nondiversifiable Jump Risk | |
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| Black-Scholes versus Jump-Diffusion Model | |
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| Summary | |
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| Exercises | |
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| Asset Pricing in Continuous Time | |
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| Continuous-Time Consumption and Portfolio Choice | |
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| Model Assumptions | |
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| Continuous-Time Dynamic Programming | |
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| Solving the Continuous-Time Problem | |
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| Constant Investment Opportunities | |
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| Changing Investment Opportunities | |
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| The Martingale Approach to Consumption and Portfolio Choice | |
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| Market Completeness Assumptions | |
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| The Optimal Consumption Plan | |
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| The Portfolio Allocation | |
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| An Example | |
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| Summary | |
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| Exercises | |
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| Equilibrium Asset Returns | |
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| An Intertemporal Capital Asset Pricing Model | |
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| Constant Investment Opportunities | |
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| Stochastic Investment Opportunities | |
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| An Extension to State-Dependent Utility | |
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| Breeden's Consumption CAPM | |
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| A Cox, Ingersoll, and Ross Production Economy | |
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| An Example Using Log Utility | |
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| Summary | |
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| Exercises | |
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| Time-Inseparable Utility | |
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| Constantinides' Internal Habit Model | |
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| Assumptions | |
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| Consumption and Portfolio Choices | |
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| Campbell and Cochrane's External Habit Model | |
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| Assumptions | |
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| Equilibrium Asset Prices | |
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| Recursive Utility | |
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| A Model by Obstfeld | |
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| Discussion of the Model | |
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| Summary | |
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| Exercises | |
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| Additional Topics in Asset Pricing | |
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| Behavioral Finance and Asset Pricing | |
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| The Effects of Psychological Biases on Asset Prices | |
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| Assumptions | |
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| Solving the Model | |
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| Model Results | |
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| The Impact of Irrational Traders on Asset Prices | |
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| Assumptions | |
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| Solution Technique | |
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| Analysis of the Results | |
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| Summary | |
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| Exercises | |
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| Asset Pricing with Differential Information | |
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| Equilibrium with Private Information | |
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| Grossman Model Assumptions | |
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| Individuals'Asset Demands | |
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| A Competitive Equilibrium | |
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| A Rational Expectations Equilibrium | |
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| A Noisy Rational Expectations Equilibrium | |
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| Asymmetric Information, Trading, and Markets | |
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| Kyle Model Assumptions | |
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| Trading and Pricing Strategies | |
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| Analysis of the Results | |
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| Summary | |
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| Exercises | |
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| Models of the Term Structure of Interest Rates | |
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| Equilibrium Term Structure Models | |
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| Affine Models | |
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| Quadratic Gaussian Models | |
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| Other Equilibrium Models | |
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| Valuation Models for Interest Rate Derivatives | |
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| Heath-Jarrow-Morton Models | |
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| Market Models | |
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| Random Field Models | |
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| Summary | |
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| Exercises | |
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| Models of Default Risk | |
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| The Structural Approach | |
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| The Reduced-Form Approach | |
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| A Zero-Recovery Bond | |
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| Specifying Recovery Values | |
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| Examples | |
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| Summary | |
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| Exercises | |
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| References | |
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| Index | |