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Asset Pricing : Revised Edition - John H. Cochrane

Asset Pricing

Revised Edition


Published: 3rd January 2005
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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.

Co-Winner of the 2001 Paul A. Samuelson award "This is a brilliant and useful book, well-deserving of the TIAA-CREF Samuelson Award... The clever intuition and informal writing style make it a joy to read. Like a star athlete does with the sport, Cochrane makes it look easier than it really is."--Journal of Economic Literature

Acknowledgments v Prefacep. xiii
Asset Pricing Theoryp. 3
Consumption-Based Model and Overviewp. 5
Basic Pricing Equationp. 6
Marginal Rate of Substitution/Stochastic Discount Factorp. 8
Prices, Payoffs, and Notationp. 10
Classic Issues in Financep. 12
Discount Factors in Continuous Timep. 28
Problemsp. 33
Applying the Basic Modelp. 37
Assumptions and Applicabilityp. 37
General Equilibriump. 39
Consumption-Based Model in Practicep. 44
Alternative Asset Pricing Models: Overviewp. 46
Problemsp. 48
Contingent Claims Marketsp. 51
Contingent Claimsp. 51
Risk-Neutral Probabilitiesp. 53
Investors Againp. 54
Risk Sharingp. 56
State Diagram and Price Functionp. 58
The Discount Factorp. 63
Law of One Price and Existence of a Discount Factorp. 64
No Arbitrage and Positive Discount Factorsp. 69
An Alternative Formula, and x* in Continuous Timep. 74
Problemsp. 77
Mean-Variance Frontier and Beta Representationsp. 79
Expected Return-Beta Representationsp. 80
Mean-Variance Frontier: Intuition and Lagrangian Characterizationp. 83
An Orthogonal Characterization of the Mean-Variance Frontierp. 86
Spanning the Mean-Variance Frontierp. 91
A Compilation of Properties of R*, R e *, and x*p. 92
Mean-Variance Frontiers for m: The Hansen-Jagannathan Boundsp. 95
Problemsp. 100
Relation between Discount Factors, Betas, and Mean-Variance Frontiersp. 101
From Discount Factors to Beta Representationsp. 102
From Mean-Variance Frontier to a Discount Factor and Beta Representationp. 105
Factor Models and Discount Factorsp. 108
Discount Factors and Beta Models to Mean-Variance Frontierp. 112
Three Risk-Free Rate Analoguesp. 113
Mean-Variance Special Cases with No Risk-Free Ratep. 119
Problemsp. 122
Implications of Existence and Equivalence Theoremsp. 123
Conditioning Informationp. 133
Scaled Payoffsp. 134
Sufficiency of Adding Scaled Returnsp. 136
Conditional and Unconditional Modelsp. 138
Scaled Factors: A Partial Solutionp. 146
Summaryp. 148
Problemsp. 148
Factor Pricing Modelsp. 149
Capital Asset Pricing Model (CAPM)p. 152
Intertemporal Capital Asset Pricing Model (ICAPM)p. 166
Comments on the CAPM and ICAPMp. 168
Arbitrage Pricing Theory (APT)p. 173
APT vs. ICAPMp. 183
Problemsp. 184
Estimating and Evaluating Asset Pricing Modelsp. 185
GMM in Explicit Discount Factor Modelsp. 189
The Recipep. 190
Interpreting the GMM Procedurep. 192
Applying GMMp. 196
GMM: General Formulas and Applicationsp. 201
General GMM Formulasp. 202
Testing Momentsp. 206
Standard Errors of Anything by Delta Methodp. 207
Using GMM for Regressionsp. 208
Prespecified Weighting Matrices and Moment Conditionsp. 210
Estimating on One Group of Moments, Testing on Anotherp. 219
Estimating the Spectral Density Matrixp. 220
Problemsp. 228
Regression-Based Tests of Linear Factor Modelsp. 229
Time-Series Regressionsp. 230
Cross-Sectional Regressionsp. 235
Fama-MacBeth Procedurep. 244
Problemsp. 251
GMM for Linear Factor Models in Discount Factor Formp. 253
GMM on the Pricing Errors Gives a Cross-Sectional Regressionp. 253
The Case of Excess Returnsp. 256
Horse Racesp. 258
Testing for Characteristicsp. 259
Testing for Priced Factors: Lambdas or b''s?p. 260
Problemsp. 264
Maximum Likelihoodp. 265
Maximum Likelihoodp. 265
ML is GMM on the Scoresp. 268
When Factors are Returns, ML Prescribes a Time-Series Regressionp. 270
When Factors are Not Excess Returns, Regression ML Prescribes a Cross-Sectionalp. 273
Problemsp. 275
Time Series, Cross-Section, and GMM/DF Tests of Linear Factor Modelsp. 277
Three Approaches to the CAPM in Size Portfoliosp. 278
Monte Carlo and Bootstrapp. 285
Which Method?p. 291
Bonds and Optionsp. 307
Option Pricingp. 311
Backgroundp. 311
Black-Scholes Formulap. 318
Problemsp. 324
Option Pricing without Perfect Replicationp. 325
On the Edges of Arbitragep. 325
One-Period Good-Deal Boundsp. 327
Multiple Periods and Continuous Timep. 334
Extensions, Other Approaches, and Bibliographyp. 344
Problemsp. 346
Term Structure of Interest Ratesp. 347
Definitions and Notationp. 347
Yield Curve and Expectations Hypothesisp. 352
Term Structure Models--A Discrete-Time Introductionp. 355
Continuous-Time Term Structure Modelsp. 360
Three Linear Term Structure Modelsp. 366
Bibliography and Commentsp. 377
Problemsp. 380
Empirical Surveyp. 383
Expected Returns in the Time Series and Cross Sectionp. 387
Time-Series Predictabilityp. 389
The Cross Section: CAPM and Multifactor Modelsp. 434
Summary and Interpretationp. 448
Problemsp. 453
Equity Premium Puzzle and Consumption-Based Modelsp. 455
Equity Premium Puzzlesp. 456
New Modelsp. 465
Bibliographyp. 481
Problemsp. 484
Appendixp. 487
Continuous Timep. 489
Brownian Motionp. 489
Diffusion Modelp. 491
Ito''s Lemmap. 494
Problemsp. 495
Referencesp. 497
Author Indexp. 511
Subject Indexp. 515
Table of Contents provided by Publisher. All Rights Reserved.

ISBN: 9780691121376
ISBN-10: 0691121370
Series: International Studen
Audience: Tertiary; University or College
Format: Hardcover
Language: English
Number Of Pages: 533
Published: 3rd January 2005
Country of Publication: US
Dimensions (cm): 23.42 x 16.56  x 3.99
Weight (kg): 0.92
Edition Number: 2
Edition Type: Revised