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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 | |