Asset Pricing

ISBN-10: 0691121370
ISBN-13: 9780691121376
Edition: 2005 (Revised)
Authors: John H. Cochrane
List price: $115.00 Buy it from $20.46
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Description: Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced  More...

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Book details

List price: $115.00
Copyright year: 2005
Publisher: Princeton University Press
Publication date: 1/23/2005
Binding: Hardcover
Pages: 560
Size: 6.25" wide x 9.25" long x 1.50" tall
Weight: 2.244

Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane traces the pricing of all assets back to a single idea--price equals expected discounted payoff--that captures the macro-economic risks underlying each security's value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model--consumption based, CAPM, multifactor, term structure, and option pricing--is derived as a different specification of the discounted factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.

Acknowledgments v Preface
Asset Pricing Theory
Consumption-Based Model and Overview
Basic Pricing Equation
Marginal Rate of Substitution/Stochastic Discount Factor
Prices, Payoffs, and Notation
Classic Issues in Finance
Discount Factors in Continuous Time
Problems
Applying the Basic Model
Assumptions and Applicability
General Equilibrium
Consumption-Based Model in Practice
Alternative Asset Pricing Models: Overview
Problems
Contingent Claims Markets
Contingent Claims
Risk-Neutral Probabilities
Investors Again
Risk Sharing
State Diagram and Price Function
The Discount Factor
Law of One Price and Existence of a Discount Factor
No Arbitrage and Positive Discount Factors
An Alternative Formula, and x* in Continuous Time
Problems
Mean-Variance Frontier and Beta Representations
Expected Return-Beta Representations
Mean-Variance Frontier: Intuition and Lagrangian Characterization
An Orthogonal Characterization of the Mean-Variance Frontier
Spanning the Mean-Variance Frontier
A Compilation of Properties of R*, R e *, and x*
Mean-Variance Frontiers for m: The Hansen-Jagannathan Bounds
Problems
Relation between Discount Factors, Betas, and Mean-Variance Frontiers
From Discount Factors to Beta Representations
From Mean-Variance Frontier to a Discount Factor and Beta Representation
Factor Models and Discount Factors
Discount Factors and Beta Models to Mean-Variance Frontier
Three Risk-Free Rate Analogues
Mean-Variance Special Cases with No Risk-Free Rate
Problems
Implications of Existence and Equivalence Theorems
Conditioning Information
Scaled Payoffs
Sufficiency of Adding Scaled Returns
Conditional and Unconditional Models
Scaled Factors: A Partial Solution
Summary
Problems
Factor Pricing Models
Capital Asset Pricing Model (CAPM)
Intertemporal Capital Asset Pricing Model (ICAPM)
Comments on the CAPM and ICAPM
Arbitrage Pricing Theory (APT)
APT vs. ICAPM
Problems
Estimating and Evaluating Asset Pricing Models
GMM in Explicit Discount Factor Models
The Recipe
Interpreting the GMM Procedure
Applying GMM
GMM: General Formulas and Applications
General GMM Formulas
Testing Moments
Standard Errors of Anything by Delta Method
Using GMM for Regressions
Prespecified Weighting Matrices and Moment Conditions
Estimating on One Group of Moments, Testing on Another
Estimating the Spectral Density Matrix
Problems
Regression-Based Tests of Linear Factor Models
Time-Series Regressions
Cross-Sectional Regressions
Fama-MacBeth Procedure
Problems
GMM for Linear Factor Models in Discount Factor Form
GMM on the Pricing Errors Gives a Cross-Sectional Regression
The Case of Excess Returns
Horse Races
Testing for Characteristics
Testing for Priced Factors: Lambdas or b''s?
Problems
Maximum Likelihood
Maximum Likelihood
ML is GMM on the Scores
When Factors are Returns, ML Prescribes a Time-Series Regression
When Factors are Not Excess Returns, Regression ML Prescribes a Cross-Sectional
Problems
Time Series, Cross-Section, and GMM/DF Tests of Linear Factor Models
Three Approaches to the CAPM in Size Portfolios
Monte Carlo and Bootstrap
Which Method?
Bonds and Options
Option Pricing
Background
Black-Scholes Formula
Problems
Option Pricing without Perfect Replication
On the Edges of Arbitrage
One-Period Good-Deal Bounds
Multiple Periods and Continuous Time
Extensions, Other Approaches, and Bibliography
Problems
Term Structure of Interest Rates
Definitions and Notation
Yield Curve and Expectations Hypothesis
Term Structure Models--A Discrete-Time Introduction
Continuous-Time Term Structure Models
Three Linear Term Structure Models
Bibliography and Comments
Problems
Empirical Survey
Expected Returns in the Time Series and Cross Section
Time-Series Predictability
The Cross Section: CAPM and Multifactor Models
Summary and Interpretation
Problems
Equity Premium Puzzle and Consumption-Based Models
Equity Premium Puzzles
New Models
Bibliography
Problems
Appendix
Appendix
Continuous Time
Brownian Motion
Diffusion Model
Ito''s Lemma
Problems
References
Author Index
Subject Index

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