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Intermediate Financial Theory by Danthine EBOOK PDF Instant Download

Table of Contents

Cover image

Title page

Copyright

Preface

Epigraph

Dedication

Part I: Introduction

Chapter 1. On the Role of Financial Markets and Institutions

1.1 Finance: The Time Dimension

1.2 Desynchronization: The Risk Dimension

1.3 The Screening and Monitoring Functions of the Financial System

1.4 The Financial System and Economic Growth

1.5 Financial Markets and Social Welfare

1.6 Financial Intermediation and the Business Cycle

1.7 Financial Crises

1.8 Conclusion

References

Complementary Readings

Appendix: Introduction to General Equilibrium Theory

Chapter 2. The Challenges of Asset Pricing: A Road Map

2.1 The Main Question of Financial Theory

2.2 Discounting Risky Cash Flows: Various Lines of Attack

2.3 Two Main Perspectives: Equilibrium versus Arbitrage

2.4 Decomposing Risk Premia

2.5 Models and Stylized Facts

2.6 Asset Pricing Is Not All of Finance!

2.7 Banks

2.8 Conclusions

References

Part II: The Demand for Financial Assets

Chapter 3. Making Choices in Risky Situations

3.1 Introduction

3.2 Choosing Among Risky Prospects: Preliminaries

3.3 A Prerequisite: Choice Theory Under Certainty

3.4 Choice Theory Under Uncertainty: An Introduction

3.5 The Expected Utility Theorem

3.6 How Restrictive Is Expected Utility Theory? The Allais Paradox

3.7 Behavioral Finance

3.8 Conclusions

References

Chapter 4. Measuring Risk and Risk Aversion

4.1 Introduction

4.2 Measuring Risk Aversion

4.3 Interpreting the Measures of Risk Aversion

4.4 Risk Premium and Certainty Equivalence

4.5 Assessing the Degree of Relative Risk Aversion

4.6 The Concept of Stochastic Dominance

4.7 Mean Preserving Spreads

4.8 An Unsettling Observation About Expected Utility

4.9 Applications: Leverage and Risk

4.10 Conclusions

References

Appendix: Proof of Theorem 4.2

Chapter 5. Risk Aversion and Investment Decisions, Part 1

5.1 Introduction

5.2 Risk Aversion and Portfolio Allocation: Risk-Free Versus Risky Assets

5.3 Portfolio Composition, Risk Aversion, and Wealth

5.4 Special Case of Risk-Neutral Investors

5.5 Risk Aversion and Risky Portfolio Composition

5.6 Risk Aversion and Savings Behavior

5.7 Generalizing the VNM-Expected Utility Representation

5.8 Conclusions

References

Chapter 6. Risk Aversion and Investment Decisions, Part II: Modern Portfolio Theory

6.1 Introduction

6.2 More About Utility Functions and Return Distributions

6.3 Refining the Normality-of-Returns Assumption

6.4 Description of the Opportunity Set in the Mean–Variance Space: The Gains from Diversification and the Efficient Frontier

6.5 The Optimal Portfolio: A Separation Theorem

6.6 Stochastic Dominance and Diversification

6.7 Conclusions

References

Appendix 6.1: Indifference Curves Under Quadratic Utility or Normally Distributed Returns

Appendix 6.2: The Shape of the Efficient Frontier; Two Assets; Alternative Hypotheses

Appendix 6.3: Constructing the Efficient Frontier

Chapter 7. Risk Aversion and Investment Decisions, Part III: Challenges to Implementation

7.1 Introduction

7.2 The Consequences of Parameter Uncertainty

7.3 Trends and Cycles in Stock Market Return Data

7.4 Equally Weighted Portfolios

7.5 Are Stocks Less Risky for Long Investment Horizons?

7.6 Conclusions

References

Appendix 7.1

Part III: Equilibrium Pricing

Chapter 8. The Capital Asset Pricing Model

8.1 Introduction

8.2 The Traditional Approach to the CAPM

8.3 Valuing Risky Cash Flows with the CAPM

8.4 The Mathematics of the Portfolio Frontier: Many Risky Assets and No Risk-Free Asset

8.5 Characterizing Efficient Portfolios (No Risk-Free Assets)

8.6 Background for Deriving the Zero-Beta CAPM: Notion of a Zero-Covariance Portfolio

8.7 The Zero-Beta CAPM

8.8 The Standard CAPM

8.9 An Empirical Assessment of the CAPM

8.10 Conclusions

References

Appendix 8.1: Proof of the CAPM Relationship

Appendix 8.2: The Mathematics of the Portfolio Frontier: An Example

Appendix 8.3: Diagrammatic Representation of the Fama–MacBeth Two-Step Procedure

Chapter 9. Arrow–Debreu Pricing, Part I

9.1 Introduction

9.2 Setting: An Arrow–Debreu Economy

9.3 Competitive Equilibrium and Pareto Optimality Illustrated

9.4 Pareto Optimality and Risk Sharing

9.5 Implementing PO Allocations: On the Possibility of Market Failure

9.6 Risk-Neutral Valuations

9.7 Conclusions

References

Chapter 10. The Consumption Capital Asset Pricing Model

10.1 Introduction

10.2 The Representative Agent Hypothesis and its Notion of Equilibrium

10.3 An Exchange (Endowment) Economy

10.4 Pricing Arrow–Debreu State-Contingent Claims with the CCAPM

10.5 Testing the CCAPM: The Equity Premium Puzzle

10.6 Testing the CCAPM: Hansen–Jagannathan Bounds

10.7 The SDF in Greater Generality

10.8 Some Extensions

10.9 Conclusions

References

Appendix 10.1 Solving the CCAPM with Growth

Appendix 10.2 Some Properties of the Lognormal Distribution

Part IV: Arbitrage Pricing

Chapter 11. Arrow–Debreu Pricing, Part II

11.1 Introduction

11.2 Market Completeness and Complex Securities

11.3 Constructing State-Contingent Claims Prices in a Risk-Free World: Deriving the Term Structure

11.4 The Value Additivity Theorem

11.5 Using Options to Complete the Market: An Abstract Setting

11.6 Synthesizing State-Contingent Claims: A First Approximation

11.7 Recovering Arrow–Debreu Prices from Options Prices: A Generalization

11.8 Arrow–Debreu Pricing in a Multiperiod Setting

11.9 Conclusions

References

Appendix 11.1: Forward Prices and Forward Rates

Chapter 12. The Martingale Measure: Part I

12.1 Introduction

12.2 The Setting and the Intuition

12.3 Notation, Definitions, and Basic Results

12.4 Uniqueness

12.5 Incompleteness

12.6 Equilibrium and No Arbitrage Opportunities

12.7 Application: Maximizing the Expected Utility of Terminal Wealth

12.8 Conclusions

References

Appendix 12.1 Finding the Stock and Bond Economy That Is Directly Analogous to the Arrow–Debreu Economy in Which Only State Claims Are Traded

Appendix 12.2 Proof of the Second Part of Proposition 12.6

Chapter 13. The Martingale Measure: Part II

13.1 Introduction

13.2 Discrete Time Infinite Horizon Economies: A CCAPM Setting

13.3 Risk-Neutral Pricing in the CCAPM

13.4 The Binomial Model of Derivatives Valuation

13.5 Continuous Time: An Introduction to the Black–Scholes Formula

13.6 Dybvig’s Evaluation of Dynamic Trading Strategies

13.7 Conclusions

References

Appendix 13.1: Risk-Neutral Valuation When Discounting at the Term Structure of Multiperiod Discount Bond

Chapter 14. The Arbitrage Pricing Theory

14.1 Introduction

14.2 Factor Models: A First Illustration

14.3 A Second Illustration: Multifactor Models, and the CAPM

14.4 The APT: A Formal Statement

14.5 Macroeconomic Factor Models

14.6 Models with Factor-Mimicking Portfolios

14.7 Advantage of the APT for Stock or Portfolio Selection

14.8 Conclusions

References

Appendix A.14.1: A Graphical Interpretation of the APT

Appendix 14.2: Capital Budgeting

Chapter 15. An Intuitive Overview of Continuous Time Finance

15.1 Introduction

15.2 Random Walks and Brownian Motion

15.3 More General Continuous Time Processes

15.4 A Continuous Time Model of Stock Price Behavior

15.5 Simulation and European Call Pricing

15.6 Solving Stochastic Differential Equations: A First Approach

15.7 A Second Approach: Martingale Methods

15.8 Applications

15.9 Final Comments

References

Chapter 16. Portfolio Management in the Long Run

16.1 Introduction

16.2 The Myopic Solution

16.3 Variations in the Risk-Free Rate

16.4 The Long-Run Behavior of Stock Returns

16.5 Background Risk: The Implications of Labor Income for Portfolio Choice

16.6 An Important Caveat

16.7 Another Background Risk: Real Estate

16.8 Conclusions

References

Chapter 17. Financial Structure and Firm Valuation in Incomplete Markets

17.1 Introduction

17.2 Financial Structure and Firm Valuation

17.3 Arrow–Debreu and Modigliani–Miller

17.4 On the Role of Short Selling

17.5 Financing and Growth

17.6 Conclusions

References

Appendix Details of the Solution of the Contingent Claims Trade Case of Section 17.5

Chapter 18. Financial Equilibrium with Differential Information

18.1 Introduction

18.2 On the Possibility of an Upward-Sloping Demand Curve

18.3 An Illustration of the Concept of REE: Homogeneous Information

18.4 Fully Revealing REE: An Example

18.5 The Efficient Market Hypothesis

References

Appendix Bayesian Updating with the Normal Distribution

Index

List of Frequently Used Symbols and Notation

Roman Alphabet

Greek Alphabet

Numerals and Other Terms