Handbook of the Economics of Finance

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ISBN: 9780444513632 | 0444513639
Cover: Hardcover
Copyright: 11/4/2003

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Summary

Supplemental Materials

Volume 1B covers the economics of financial markets: the saving and investment decisions; the valuation of equities, derivatives, and fixed income securities; and market microstructure.

VOLUME 1B

Introduction to the Series

Contents of the Handbook

vii

Preface

FINANCIAL MARKETS AND ASSET PRICING

Chapter 10 Arbitrage, State Prices and Portfolio Theory

PHILIP H. DYBVIG and STEPHEN A. ROSS

605

(34)

Abstract

606

(1)

Keywords

606

(1)

1. Introduction

607

(1)

2. Portfolio problems

607

(5)

3. Absence of arbitrage and preference-free results

612

(1)

3.1. Fundamental theorem of asset pricing

614

(1)

3.2. Pricing rule representation theorem

616

(2)

4. Various analyses: Arrow-Debreu world

618

(1)

4.1. Optimal portfolio choice

619

(1)

4.2. Efficient portfolios

619

(1)

4.3. Aggregation

620

(1)

4.4. Asset pricing

621

(1)

4.5. Payoff distribution pricing

622

(2)

5. Capital asset pricing model (CAPM)

624

(5)

6. Mutual fund separation theory

629

(1)

6.1. Preference approach

629

(1)

6.2. Beliefs

631

(2)

7. Arbitrage pricing theory (APT)

633

(1)

8. Conclusion

634

(1)

References

634

(5)

Chapter 11 Intertemporal Asset Pricing Theory

DARRELL DUFFLE

639

(104)

Abstract

641

(1)

Keywords

641

(1)

1. Introduction

642

(1)

2. Basic theory

642

(1)

2.1. Setup

643

(1)

2.2. Arbitrage, state prices, and martingales

644

(1)

2.3. Individual agent optimality

646

(1)

2.4. Habit and recursive utilities

647

(1)

2.5. Equilibrium and Pareto optimality

649

(1)

2.6. Equilibrium asset pricing

651

(1)

2.7. Breeden's consumption-based CAPM

653

(1)

2.8. Arbitrage and martingale measures

654

(1)

2.9. Valuation of redundant securities

656

(1)

2.10. American exercise policies and valuation

657

(4)

3. Continuous-time modeling

661

(1)

3.1. Trading gains for Brownian prices

662

(1)

3.2. Martingale trading gains

663

(1)

3.3. The Black-Scholes option-pricing formula

665

(1)

3.4. Ito's Formula

668

(1)

3.5. Arbitrage modeling

670

(1)

3.6. Numeraire invariance

670

(1)

3.7. State prices and doubling strategies

671

(1)

3.8. Equivalent martingale measures

672

(1)

3.9. Girsanov and market prices of risk

672

(1)

3.10. Black-Scholes again

676

(1)

3.11. Complete markets

677

(1)

3.12. Optimal trading and consumption

678

(1)

3.13. Martingale solution to Merton's problem

682

(4)

4. Term-structure models

686

(1)

4.1. One-factor models

687

(1)

4.2. Term-structure derivatives

691

(1)

4.3. Fundamental solution

693

(1)

4.4. Multifactor term-structure models

695

(1)

4.5. Affine models

696

(1)

4.6. The HJM model of forward rates

699

(3)

5. Derivative pricing

702

(1)

5.1. Forward and futures prices

702

(1)

5.2. Options and stochastic volatility

705

(1)

5.3. Option valuation by transform analysis

708

(3)

6. Corporate securities

711

(1)

6.1. Endogenous default timing

712

(1)

6.2. Example: Brownian dividend growth

713

(1)

6.3. Taxes, bankruptcy costs, capital structure

717

(1)

6.4. Intensity-based modeling of default

719

(1)

6.5. Zero-recovery bond pricing

721

(1)

6.6. Pricing with recovery at default

722

(1)

6.7. Default-adjusted short rate

724

(1)

References

725

(18)

Chapter 12 Tests of Multifactor Pricing Models, Volatility Bounds and Portfolio Performance

WAYNE E. FERSON

743

(60)

Abstract

745

(1)

Keywords

745

(1)

1. Introduction

746

(2)

2. Multifactor asset-pricing models: Review and integration

748

(1)

2.1. The stochastic discount factor representation

748

(1)

2.2. Expected risk premiums

750

(1)

2.3. Return predictability

751

(1)

2.4. Consumption-based asset-pricing models

753

(1)

2.5. Multi-beta pricing models

754

(1)

2.6. Mean-variance efficiency with conditioning information

760

(1)

2.7. Choosing the factors

765

(3)

3. Modern variance bounds

768

(1)

3.1. The Hansen-Jagannathan bounds

768

(1)

3.2. Variance bounds with conditioning information

770

(1)

3.3. The Hansen-Jagannathan distance

773

(1)

4. Methodology and tests of multifactor asset-pricing models

774

(1)

4.1. The Generalized Method of Moments approach

774

(1)

4.2. Cross-sectional regression methods

775

(1)

4.3. Multivariate regression and beta-pricing models

781

(4)

5. Conditional performance evaluation

785

(1)

5.1. Stochastic discount factor formulation

787

(1)

5.2. Beta-pricing formulation

788

(1)

5.3. Using portfolio weights

790

(1)

5.4. Conditional market-timing models

792

(1)

5.5. Empirical evidence on conditional performance

793

(1)

6. Conclusions

794

(1)

References

795

(8)

Chapter 13 Consumption-Based Asset Pricing

JOHN Y CAMPBELL

803

(86)

Abstract

804

(1)

Keywords

804

(1)

1. Introduction

805

(5)

2. International stock market data

810

(6)

3. The equity premium puzzle

816

(1)

3.1. The stochastic discount factor

816

(1)

3.2. Consumption-based asset pricing with power utility

819

(1)

3.3. The risk-free rate puzzle

824

(1)

3.4. Bond returns and the equity-premium and risk-free rate puzzles

827

(1)

3.5. Separating risk aversion and intertemporal substitution

828

(4)

4. The dynamics of asset returns and consumption

832

(1)

4.1. Time-variation in conditional expectations

832

(1)

4.2. A loglinear asset-pricing framework

836

(1)

4.3. The equity volatility puzzle

840

(1)

4.4. Implications for the equity premium puzzle

845

(1)

4.5. What does the stock market forecast?

849

(1)

4.6. Changing volatility in stock returns

857

(1)

4.7. What does the bond market forecast?

859

(7)

5. Cyclical variation in the price of risk

866

(1)

5.1. Habit formation

866

(1)

5.2. Models with heterogeneous agents

873

(1)

5.3. Irrational expectations

876

(3)

6. Some implications for macroeconomics

879

(2)

References

881

(8)

Chapter 14 The Equity Premium in Retrospect

RAINISH MEHRA and EDWARD C. PRESCOTT

889

(50)

Abstract

890

(1)

Keywords

890

(1)

1. Introduction

891

(1)

2. The equity premium: history

891

(1)

2.1. Facts

891

(1)

2.2. Data sources

892

(1)

2.3. Estimates of the equity premium

894

(1)

2.4. Variation in the equity premium over time

897

(2)

3. Is the equity premium due to a premium for bearing non-diversifiable risk?

899

(1)

3.1. Standard preferences

902

(1)

3.2. Estimating the equity risk premium versus estimating the risk aversion parameter

912

(1)

3.3. Alternative preference structures

913

(1)

3.4. Idiosyncratic and uninsurable income risk

918

(1)

3.5. Models incorporating a disaster state and survivorship bias

920

(1)

4. Is the equity premium due to borrowing constraints, a liquidity premium or taxes?

921

(1)

4.1. Borrowing constraints

921

(1)

4.2. Liquidity premium

924

(1)

4.3. Taxes and regulation

924

(3)

5. An equity premium in the future?

927

(1)

Appendix A

928

(2)

Appendix B. The original analysis of the equity premium puzzle

930

(1)

B.1. The economy, asset prices and returns

930

(5)

References

935

(4)

Chapter 15 Anomalies and Market Efficiency

G. WILLIAM SCHWERT

939

(36)

Abstract

941

(1)

Keywords

941

(1)

1. Introduction

942

(1)

2. Selected empirical regularities

943

(1)

2.1. Predictable differences in returns across assets

943

(1)

2.2. Predictable differences in returns through time

951

(5)

3. Returns to different types of investors

956

(1)

3.1. Individual investors

956

(1)

3.2. Institutional investors

958

(1)

3.3. Limits to arbitrage

961

(1)

4. Long-run returns

961

(1)

4.1. Returns to firms issuing equity

962

(1)

4.2. Returns to bidder firms

964

(2)

5. Implications for asset pricing

966

(1)

5.1. The search for risk factors

966

(1)

5.2. Conditional asset pricing

967

(1)

5.3. Excess volatility

967

(1)

5.4. The role of behavioral finance

967

(1)

6. Implications for corporate finance

968

(1)

6.1. Firm size and liquidity

968

(1)

6.2. Book-to-market effects

968

(1)

6.3. Slow reaction to corporate financial policy

969

(1)

7. Conclusions

970

(1)

References

970

(5)

Chapter 16 Are Financial Assets Priced Locally or Globally?

G. ANDREW KAROLYI and RENE M. STULI

975

(46)

Abstract

976

(1)

Keywords

976

(1)

1. Introduction

977

(1)

2. The perfect financial markets model

978

(1)

2.1. Identical consumption-opportunity sets across countries

979

(1)

2.2. Different consumption-opportunity sets across countries

982

(1)

2.3. A general approach

988

(1)

2.4. Empirical evidence on asset pricing using perfect market models

992

(5)

3. Home bias

997

(7)

4. Flows, spillovers, and contagion

1004

(1)

4.1. Flows and returns

1007

(1)

4.2. Correlations, spillovers, and contagion

1010

(4)

5. Conclusion

1014

(1)

References

1014

(7)

Chapter 17 Microstructure and Asset Pricing

DAVID EASLEY and MAUREEN O'HARA

1021

(32)

Abstract

1022

(1)

Keywords

1022

(1)

1. Introduction

1023

(1)

2. Equilibrium asset pricing

1024

(1)

3. Asset pricing in the short-run

1025

(1)

3.1. The mechanics of pricing behavior

1026

(1)

3.2. The adjustment of prices to information

1029

(1)

3.3. Statistical and structural models of microstructure data

1031

(1)

3.4. Volume and price movements

1033

(2)

4. Asset pricing in the long-run

1035

(1)

4.1. Liquidity

1036

(1)

4.2. Information

1041

(3)

5. Linking microstructure and asset pricing: puzzles for researchers

1044

(3)

References

1047

(6)

Chapter 18 A Survey of Behavioral Finance

NICHOLAS BARBERIS and RICHARD THALER

1053

(72)

Abstract

1054

(1)

Keywords

1054

(1)

1. Introduction

1055

(1)

2. Limits to arbitrage

1056

(1)

2.1. Market efficiency

1056

(1)

2.2. Theory

1058

(1)

2.3. Evidence

1061

(4)

3. Psychology

1065

(1)

3.1. Beliefs

1065

(1)

3.2. Preferences

1069

(6)

4. Application: The aggregate stock market

1075

(1)

4.1. The equity premium puzzle

1078

(1)

4.2. The volatility puzzle

1083

(4)

5. Application: The cross-section of average returns

1087

(1)

5.1. Belief based models

1092

(1)

5.2. Belief based models with institutional frictions

1095

(1)

5.3. Preferences

1097

(1)

6. Application: Closed-end funds and comovement

1098

(1)

6.1. Closed-end funds

1098

(1)

6.2. Comovement

1099

(2)

7. Application: Investor behavior

1101

(1)

7.1. Insufficient diversification

1101

(1)

7.2. Naive diversification

1103

(1)

7.3. Excessive trading

1103

(1)

7.4. The selling decision

1104

(1)

7.5. The buying decision

1105

(1)

8. Application: Corporate finance

1106

(1)

8.1. Security issuance, capital structure and investment

1106

(1)

8.2. Dividends

1109

(1)

8.3. Models of managerial irrationality

1111

(2)

9. Conclusion

1113

(2)

Appendix A

1115

(1)

References

1116

(9)

Finance, Optimization, and the Irreducibly Irrational Component of Human Behavior

ROBERT J. SHILLER

1125

(4)

Chapter 19 Derivatives

ROBERT E. WHALEY

1129

(78)

Abstract

1131

(1)

Keywords

1131

(1)

1. Introduction

1132

(1)

2. Background

1133

(6)

3. No-arbitrage pricing relations

1139

(1)

3.1. Carrying costs

1140

(1)

3.2. Valuing forward/futures using the no-arbitrage principle

1141

(1)

3.3. Valuing options using the no-arbitrage principle

1143

(5)

4. Option valuation

1148

(1)

4.1. The Black-Scholes/Merton option valuation theory

1149

(1)

4.2. Analytical formulas

1151

(1)

4.3. Approximation methods

1157

(1)

4.4. Generalizations

1164

(2)

5. Studies of no-arbitrage price relations

1166

(1)

5.1. Forward/futures prices

1167

(1)

5.2. Option prices

1169

(1)

5.3. Summary and analysis

1173

(1)

6. Studies of option valuation models

1173

(1)

6.1. Pricing errors/implied volatility anomalies

1174

(1)

6.2. Trading simulations

1176

(1)

6.3. Informational content of implied volatility

1179

(1)

6.4. Summary and analysis

1181

(8)

7. Social costs/benefits of derivatives trading

1189

(1)

7.1. Contract introductions

1189

(1)

7.2. Contract expirations

1193

(1)

7.3. Market synchronization

1194

(1)

7.4. Summary and analysis

1197

(1)

8. Summary

1198

(1)

References

1199

(8)

Chapter 20 Fixed-Income Pricing

QIANG DAI and KENNETH J. SINGLETON

1207

Abstract

1208

(1)

Keywords

1208

(1)

1. Introduction

1209

(1)

2. Fixed-income pricing in a diffusion setting

1210

(1)

2.1. The term structure

1210

(1)

2.2. Fixed-income securities with deterministic payoffs

1211

(1)

2.3. Fixed-income securities with state-dependent payoffs

1212

(1)

2.4. Fixed-income securities with stopping times

1213

(2)

3. Dynamic term-structure models for default-free bonds

1215

(1)

3.1. One-factor dynamic term-structure models

1215

(1)

3.2. Multi-factor dynamic term-structure models

1218

(4)

4. Dynamic term-structure models with jump diffusions

1222

(1)

5. Dynamic term-structure models with regime shifts

1223

(2)

6. Dynamic term-structure models with rating migrations

1225

(1)

6.1. Fractional recovery of market value

1225

(1)

6.2. Fractional recovery of par, payable at maturity

1228

(1)

6.3. Fractional recovery of par, payable at default

1229

(1)

6.4. Pricing defaultable coupon bonds

1229

(1)

6.5. Pricing Eurodollar swaps

1230

(1)

7. Pricing of fixed-income derivatives

1231

(1)

7.1. Derivatives pricing using dynamic term-structure models

1231

(1)

7.2. Derivatives pricing using forward-rate models

1232

(1)

7.3. Defaultable forward-rate models with rating migrations

1234

(1)

7.4. The LIBOR market model

1237

(1)

7.5. The swaption market model

1241

(1)

References

1242

Subject Index

I-1

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Handbook of the Economics of Finance

Summary

Table of Contents

Supplemental Materials

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Handbook of the Economics of Finance

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Supplemental Materials

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