9780691121376

Asset Pricing

by
  • ISBN13:

    9780691121376

  • ISBN10:

    0691121370

  • Edition: Revised
  • Format: Hardcover
  • Copyright: 2005-01-03
  • Publisher: Princeton Univ Pr

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Summary

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.

Author Biography

John H. Cochrane is Myron S. Scholes Professor of Finance, University of Chicago, Graduate School of Business. He is Director of the National Bureau of Economic Research Asset Pricing Program.

Table of Contents

Acknowledgments v
Preface xiii
Part I. Asset Pricing Theory
1(184)
Consumption-Based Model and Overview
3(32)
Basic Pricing Equation
4(2)
Marginal Rate of Substitution/Stochastic Discount Factor
6(2)
Prices, Payoffs, and Notation
8(2)
Classic Issues in Finance
10(15)
Discount Factors in Continuous Time
25(10)
Problems
31(4)
Applying the Basic Model
35(14)
Assumptions and Applicability
35(2)
General Equilibrium
37(4)
Consumption-Based Model in Practice
41(2)
Alternative Asset Pricing Models: Overview
43(6)
Problems
45(4)
Contingent Claims Markets
49(12)
Contingent Claims
49(2)
Risk-Neutral Probabilities
51(2)
Investors Again
53(1)
Risk Sharing
54(2)
State Diagram and Price Function
56(5)
The Discount Factor
61(16)
Law of One Price and Existence of a Discount Factor
62(5)
No Arbitrage and Positive Discount Factors
67(5)
An Alternative Formula, and X* in Continuous Time
72(5)
Problems
75(2)
Mean-Variance Frontier and Beta Representations
77(22)
Expected Return-Beta Representations
78(3)
Mean-Variance Frontier: Intuition and Lagrangian Characterization
81(3)
An Orthogonal Characterization of the Mean-Variance Frontier
84(4)
Spanning the Mean-Variance Frontier
88(1)
A Compilation of Properties of R*, Re*, and x*
89(3)
Mean-Variance Frontiers for Discount Factors: The Hansen-Jagannathan Bounds
92(7)
Problems
97(2)
Relation between Discount Factors, Betas, and Mean-Variance Frontiers
99(22)
From Discount Factors to Beta Representations
100(3)
From Mean-Variance Frontier to a Discount Factor and Beta Representation
103(3)
Factor Models and Discount Factors
106(4)
Discount Factors and Beta Models to Mean-Variance Frontier
110(1)
Three Risk-Free Rate Analogues
111(6)
Mean-Variance Special Cases with No Risk-Free Rate
117(4)
Problems
120(1)
Implications of Existence and Equivalence Theorems
121(10)
Conditioning Information
131(18)
Scaled Payoffs
132(2)
Sufficiency of Adding Scaled Returns
134(2)
Conditional and Unconditional Models
136(8)
Scaled Factors: A Partial Solution
144(1)
Summary
145(4)
Problems
146(3)
Factor Pricing Models
149(36)
Capital Asset Pricing Model (CAPM)
152(13)
Intertemporal Capital Asset Pricing Model (ICAPM)
165(2)
Comments on the CAPM and ICAPM
167(6)
Arbitrage Pricing Theory (APT)
173(9)
APT vs. ICAPM
182(3)
Problems
183(2)
Part II. Estimating and Evaluating Asset Pricing Models
185(124)
GMM in Explicit Discount Factor Models
189(12)
The Recipe
190(2)
Interpreting the GMM Procedure
192(4)
Applying GMM
196(5)
GMM: General Formulas and Applications
201(28)
General GMM Formulas
202(4)
Testing Moments
206(1)
Standard Errors of Anything by Delta Method
207(1)
Using GMM for Regressions
207(3)
Prespecified Weighting Matrices and Moment Conditions
210(8)
Estimating on One Group of Moments, Testing on Another
218(1)
Estimating the Spectral Density Matrix
219(10)
Problems
227(2)
Regression-Based Tests of Linear Factor Models
229(24)
Time-Series Regressions
230(5)
Cross-Sectional Regressions
235(10)
Fama-MacBeth Procedure
245(8)
Problems
251(2)
GMM for Linear Factor Models in Discount Factor Form
253(14)
GMM on the Pricing Errors Gives a Cross-Sectional Regression
253(3)
The Case of Excess Returns
256(3)
Horse Races
259(1)
Testing for Priced Factors: Lambdas or b's?
260(2)
Mean-Variance Frontier and Performance Evaluation
262(2)
Testing for Characteristics
264(3)
Problems
265(2)
Maximum Likelihood
267(12)
Maximum Likelihood
268(2)
ML is GMM on the Scores
270(2)
When Factors Are Returns, ML Prescribes a Time-Series Regression
272(3)
When Factors Are Not Excess Returns, ML Prescribes a Cross-Sectional Regression
275(4)
Problems
277(2)
Time-Series, Cross-Section, and GMM/DF Tests of Linear Factor Models
279(14)
Three Approaches to the CAPM in Size Portfolios
280(6)
Monte Carlo and Bootstrap
286(7)
Which Method?
293(16)
Part III. Bonds and Options
309(76)
Option Pricing
313(14)
Background
313(7)
Black-Scholes Formula
320(7)
Problems
326(1)
Option Pricing without Perfect Replication
327(22)
On the Edges of Arbitrage
327(2)
One-Period Good-Deal Bounds
329(7)
Multiple Periods and Continuous Time
336(9)
Extensions, Other Approaches, and Bibliography
345(4)
Problems
347(2)
Term Structure of Interest Rates
349(36)
Definitions and Notation
349(6)
Yield Curve and Expectations Hypothesis
355(2)
Term Structure Models---A Discrete-Time Introduction
357(5)
Continuous-Time Term Structure Models
362(6)
Three Linear Term Structure Models
368(11)
Bibliography and Comments
379(6)
Problems
382(3)
Part IV. Empirical Survey
385(102)
Expected Returns in the Time Series and Cross Section
389(66)
Time-Series Predictability
391(44)
The Cross Section: CAPM and Multifactor Models
435(14)
Summary and Interpretation
449(6)
Problems
453(2)
Equity Premium Puzzle and Consumption-Based Models
455(32)
Equity Premium Puzzles
456(9)
New Models
465(16)
Bibliography
481(6)
Problems
485(2)
Part V. Appendix
487(2)
Appendix. Continuous Time
489(8)
Brownian Motion
489(2)
Diffusion Model
491(3)
Ito's Lemma
494(3)
Problems
495(2)
References 497(16)
Author Index 513(4)
Subject Index 517

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