CONTENTS OF VOLUME IB

Size: px
Start display at page:

Download "CONTENTS OF VOLUME IB"

Transcription

1 CONTENTS OF VOLUME IB Introduction to the Series Contents of the Handbook Preface v vii ix FINANCIAL MARKETS AND ASSET PRICING Chapter 10 Arbitrage, State Prices and Portfolio Theory PHILIP H. DYBVIG and STEPHEN A. ROSS 605 Abstract 606 Keywords Introduction Portfolio problems Absence of arbitrage and preference-free results Fundamental theorem of asset pricing " Pricing rule representation theorem Various analyses: Arrow-Debreu world Optimal portfolio choice Efficient portfolios Aggregation Asset pricing Payoff distribution pricing Capital asset pricing model (CAPM) Mutual fund separation theory Preference approach Beliefs Arbitrage pricing theory (APT) Conclusion 634 References 634 Chapter 11 Intertemporal Asset Pricing Theory DARRELL DUFFIE 639 Abstract 641

2 xviii Contents of Volume IB Keywords, Introduction Basic theory Setup Arbitrage, state prices, and martingales Individual agent optimality Habit and recursive utilities Equilibrium and Pareto optimality Equilibrium asset pricing Breeden's consumption-based CAPM Arbitrage and martingale measures Valuation of redundant securities American exercise policies and valuation Continuous-time modeling Trading gains for Brownian prices ' Martingale trading gains The Black-Scholes option-pricing fonnula Ito's Formula Arbitrage modeling Numeraire invariance State prices and doubling strategies Equivalent martingale measures Girsanov and market prices of risk Black-Scholes again 676 \ Complete markets Optimal trading and consumption Martingale solution to Merton's problem Term-structure models One-factor models Term-structure derivatives Fundamental solution Multifactor term-structure models Affine models The HJM model of forward rates Derivative pricing Forward and futures prices Options and stochastic volatility Option valuation by transform analysis i Corporate securities Endogenous default timing Example: Brownian dividend growth Taxes, bankruptcy costs, capital structure Intensity-based modeling of default 719

3 Contents of Volume IB xix 6.5. Zero-recovery bond pricing Pricing with recovery at default Default-adjusted short rate 724 References 725 Chapter 12 Tests of Multifactor Pricing Models, Volatility Bounds and Portfolio Performance WAYNE E. FERSON 743 Abstract 745 Keywords Introduction Multifactor asset-pricing models: Review and integration The stochastic discount factor representation Expected risk premiums Return predictability Consumption-based asset-pricing models Multi-beta pricing models Mean-variance efficiency with conditioning information Choosing the factors Modern variance bounds The Hansen-Jagannathan bounds Variance bounds with conditioning information The Hansen-Jagannathan distance Methodology and tests of multifactor asset-pricing models The Generalized Method of Moments approach Cross-sectional regression methods Multivariate regression and beta-pricing models Conditional performance evaluation Stochastic discount factor formulation Beta-pricing formulation Using portfolio weights Conditional market-timing models Empirical evidence on conditional performance Conclusions 794 References 795 Chapter 13 Consumption-Based Asset Pricing JOHN Y. CAMPBELL 803 Abstract 804 Keywords Introduction 805

4 xx Contents of Volume IB 2. International stock market data The equity premium puzzle The stochastic discount factor " Consumption-based asset pricing with power utility The risk-free rate puzzle Bond returns and the equity-premium and risk-free rate puzzles Separating risk aversion and intertemporal substitution The dynamics of asset returns and consumption Time-variation in conditional expectations A loglinear asset-pricing framework The equity volatility puzzle Implications for the equity premium puzzle What does the stock market forecast? Changing volatility in stock returns What does the bond market forecast? ' Cyclical variation in the price of risk Habit formation Models with heterogeneous agents Irrational expectations Some implications for macroeconomics 879 References ' 881 Chapter 14 The Equity Premium in Retrospect ^RAJNISH MEHRA and EDWARD C. PRESCOTT 889 Abstract 890 Keywords Introduction The equity premium: history Facts Data sources Estimates of the equity premium Variation in the equity premium over time Is the equity premium due to a premium for bearing non-diversifiable risk? Standard preferences Estimating the equity risk premium versus estimating the risk aversion parameter Alternative preference structures Idiosyncratic and uninsurable income risk 918 '3.5. Models incorporating a disaster state and survivorship bias Is the equity premium due to borrowing constraints, a liquidity premium or taxes? Borrowing constraints Liquidity premium 924

5 Contents of Volume IB xxl 4.3. Taxes and regulation An equity premium in the future? 927 Appendix A 928 Appendix B. The original analysis of the equity premium puzzle 930 B.I. The economy, asset prices and returns 930 References 935 Chapter 15 Anomalies and Market Efficiency G. WILLIAM SCHWERT 939 Abstract 941 Keywords Introduction Selected empirical regularities Predictable differences in returns across assets Predictable differences in returns through time Returns to different types of investors ' Individual investors 95o 3.2. Institutional investors 95 o 3.3. Limits to arbitrage Long-run returns Returns to firms issuing equity Returns to bidder firms Implications for asset pricing The search for risk factors Conditional asset pricing Excess volatility The role of behavioral finance Implications for corporate finance Firm size and liquidity Book-to-market effects Slow reaction to corporate financial policy Conclusions 970 References 970 Chapter 16 Are Financial Assets Priced Locally or Globally? G. ANDREW KAROLYI and RENE M. STULZ 975 Abstract 976 Keywords Introduction The perfect financial markets model Identical consumption-opportunity sets across countries 979

6 xxii Contents of Volume IB 2.2. Different consumption-opportunity sets across countries A general approach Empirical evidence on asset pricing using perfect market models Home bias Flows, spillovers, and contagion Flows and returns Correlations, spillovers, and contagion Conclusion 1014 References 1014 Chapter 17 Microstructure and Asset Pricing DAVID EASLEY and MAUREEN O'HARA 1021 Abstract 1022 Keywords Introduction Equilibrium asset pricing Asset pricing in the short-run The mechanics of pricing behavior The adjustment of prices to information Statistical and structural models of microstructure data Volume and price movements Asset pricing in the long-run Liquidity 1036 \ 4.2. Information Linking microstructure and asset pricing: puzzles for researchers 1044 References 1047 Chapter 18 A Survey of Behavioral Finance NICHOLAS BARBERIS and RICHARD THALER 1053 Abstract 1054 Keywords Introduction Limits to arbitrage Market efficiency Theory Evidence *. Psychology Beliefs Preferences Application: The aggregate stock market The equity premium puzzle 1078

7 Contents of Volume IB xxiii 4.2. The volatility puzzle Application: The cross-section of average returns Belief-based models Belief-based models with institutional frictions Preferences 1U"/ 6. Application: Closed-end funds and comovement Closed-end funds Comovement luyy 7. Application: Investor behavior Insufficient diversification Naive diversification Excessive trading The selling decision The buying decision Application: Corporate finance Security issuance, capital structure and investment " Dividends H Models of managerial irrationality Conclusion 1113 Appendix A 1115 References M16 Finance, Optimization, and the Irreducibly Irrational Component of Human Behavior ROBERT J. SHILLER 1125 Chapter 19 Derivatives ROBERT E. WHALEY 1129 Abstract 1131 Keywords " Introduction Background No-arbitrage pricing relations Carrying costs Valuing forward/futures using the no-arbitrage principle Valuing options using the no-arbitrage principle Option valuation The Black-Scholes/Merton option valuation theory Analytical formulas H Approximation methods Generalizations 1164

8 xxiv Contents of Volume IB 5. Studies of no-arbitrage price relations Forward/futures prices Option prices Summary and analysis Studies of option valuation models Pricing errors/implied volatility anomalies Trading simulations Informational content of implied volatility Summary and analysis Social costs/benefits of derivatives trading Contract introductions Contract expirations Market synchronization Summary and analysis Summary ' 1198 References 1199 Chapter 20 Fixed-Income Pricing QIANG DAI and KENNETH J. SINGLETON 1207 Abstract 1208 Keywords Introduction Fixed-income pricing in a diffusion setting The term structure Fixed-income securities with deterministic payoffs Fixed-income securities with state-dependent payoffs Fixed-income securities with stopping times Dynamic term-structure models for default-free bonds One-factor dynamic term-structure models Multi-factor dynamic term-structure models Dynamic term-structure models with jump diffusions Dynamic term-structure models with regime shifts Dynamic term-structure models with rating migrations Fractional recovery of market value Fractional recovery of par, payable at maturity Fractional recovery of par, payable at default Pricing defaultable coupon bonds 1229 ' 6.5. Pricing Eurodollar swaps Pricing of fixed-income derivatives Derivatives pricing using dynamic term-structure models Derivatives pricing using forward-rate models Defaultable forward-rate models with rating migrations 1234

How To Understand And Understand Finance

How To Understand And Understand Finance Ill. i,t.,. QUANTITATIVE FINANCIAL ECONOMICS STOCKS, BONDS AND FOREIGN EXCHANGE Second Edition KEITH CUTHBERTSON AND DIRK NITZSCHE HOCHSCHULE John Wiley 8k Sons, Ltd CONTENTS Preface Acknowledgements 2.1

More information

How To Understand The Theory Of Finance

How To Understand The Theory Of Finance University of Pennsylvania The Wharton School FNCE 911: Foundations for Financial Economics Prof. Jessica A. Wachter Fall 2010 Office: SH-DH 2322 Classes: Mon./Wed. 1:30-3:00 Email: jwachter@wharton.upenn.edu

More information

Derivatives: Principles and Practice

Derivatives: Principles and Practice Derivatives: Principles and Practice Rangarajan K. Sundaram Stern School of Business New York University New York, NY 10012 Sanjiv R. Das Leavey School of Business Santa Clara University Santa Clara, CA

More information

Black-Scholes-Merton approach merits and shortcomings

Black-Scholes-Merton approach merits and shortcomings Black-Scholes-Merton approach merits and shortcomings Emilia Matei 1005056 EC372 Term Paper. Topic 3 1. Introduction The Black-Scholes and Merton method of modelling derivatives prices was first introduced

More information

Caput Derivatives: October 30, 2003

Caput Derivatives: October 30, 2003 Caput Derivatives: October 30, 2003 Exam + Answers Total time: 2 hours and 30 minutes. Note 1: You are allowed to use books, course notes, and a calculator. Question 1. [20 points] Consider an investor

More information

ANALYSIS AND MANAGEMENT

ANALYSIS AND MANAGEMENT ANALYSIS AND MANAGEMENT T H 1RD CANADIAN EDITION W. SEAN CLEARY Queen's University CHARLES P. JONES North Carolina State University JOHN WILEY & SONS CANADA, LTD. CONTENTS PART ONE Background CHAPTER 1

More information

MSc Finance and Economics detailed module information

MSc Finance and Economics detailed module information MSc Finance and Economics detailed module information Example timetable Please note that information regarding modules is subject to change. TERM 1 TERM 2 TERM 3 INDUCTION WEEK EXAM PERIOD Week 1 EXAM

More information

Master of Mathematical Finance: Course Descriptions

Master of Mathematical Finance: Course Descriptions Master of Mathematical Finance: Course Descriptions CS 522 Data Mining Computer Science This course provides continued exploration of data mining algorithms. More sophisticated algorithms such as support

More information

Black Scholes Merton Approach To Modelling Financial Derivatives Prices Tomas Sinkariovas 0802869. Words: 3441

Black Scholes Merton Approach To Modelling Financial Derivatives Prices Tomas Sinkariovas 0802869. Words: 3441 Black Scholes Merton Approach To Modelling Financial Derivatives Prices Tomas Sinkariovas 0802869 Words: 3441 1 1. Introduction In this paper I present Black, Scholes (1973) and Merton (1973) (BSM) general

More information

Introduction to Financial Models for Management and Planning

Introduction to Financial Models for Management and Planning CHAPMAN &HALL/CRC FINANCE SERIES Introduction to Financial Models for Management and Planning James R. Morris University of Colorado, Denver U. S. A. John P. Daley University of Colorado, Denver U. S.

More information

Pricing Interest-Rate- Derivative Securities

Pricing Interest-Rate- Derivative Securities Pricing Interest-Rate- Derivative Securities John Hull Alan White University of Toronto This article shows that the one-state-variable interest-rate models of Vasicek (1977) and Cox, Ingersoll, and Ross

More information

FRBSF ECONOMIC LETTER

FRBSF ECONOMIC LETTER FRBSF ECONOMIC LETTER 213-23 August 19, 213 The Price of Stock and Bond Risk in Recoveries BY SIMON KWAN Investor aversion to risk varies over the course of the economic cycle. In the current recovery,

More information

Third Edition. Philippe Jorion GARP. WILEY John Wiley & Sons, Inc.

Third Edition. Philippe Jorion GARP. WILEY John Wiley & Sons, Inc. 2008 AGI-Information Management Consultants May be used for personal purporses only or by libraries associated to dandelon.com network. Third Edition Philippe Jorion GARP WILEY John Wiley & Sons, Inc.

More information

Chap 3 CAPM, Arbitrage, and Linear Factor Models

Chap 3 CAPM, Arbitrage, and Linear Factor Models Chap 3 CAPM, Arbitrage, and Linear Factor Models 1 Asset Pricing Model a logical extension of portfolio selection theory is to consider the equilibrium asset pricing consequences of investors individually

More information

Option Valuation. Chapter 21

Option Valuation. Chapter 21 Option Valuation Chapter 21 Intrinsic and Time Value intrinsic value of in-the-money options = the payoff that could be obtained from the immediate exercise of the option for a call option: stock price

More information

Foundations of Asset Management Goal-based Investing the Next Trend

Foundations of Asset Management Goal-based Investing the Next Trend Foundations of Asset Management Goal-based Investing the Next Trend Robert C. Merton Distinguished Professor of Finance MIT Finance Forum May 16, 2014 #MITSloanFinance 1 Agenda Goal-based approach to investment

More information

Curriculum Vitae ROBERT F. STAMBAUGH. Ph.D., University of Chicago, 1981, finance and econometrics.

Curriculum Vitae ROBERT F. STAMBAUGH. Ph.D., University of Chicago, 1981, finance and econometrics. Curriculum Vitae ROBERT F. STAMBAUGH Finance Department The Wharton School University of Pennsylvania Philadelphia, PA 19104-6367 (215) 898-5734 (voice) (215) 898-6200 (fax) stambaugh@wharton.upenn.edu

More information

Stephane Crepey. Financial Modeling. A Backward Stochastic Differential Equations Perspective. 4y Springer

Stephane Crepey. Financial Modeling. A Backward Stochastic Differential Equations Perspective. 4y Springer Stephane Crepey Financial Modeling A Backward Stochastic Differential Equations Perspective 4y Springer Part I An Introductory Course in Stochastic Processes 1 Some Classes of Discrete-Time Stochastic

More information

A. General Rules and Conditions: 1) This plan conforms to the regulations of the general frame of the program of graduate studies.

A. General Rules and Conditions: 1) This plan conforms to the regulations of the general frame of the program of graduate studies. Study Plan for M.B.A in Banking and Finance applied from 2003/2004-2008/2009 A. General Rules and Conditions: 1) This plan conforms to the regulations of the general frame of the program of graduate studies.

More information

Lecture 1: Asset pricing and the equity premium puzzle

Lecture 1: Asset pricing and the equity premium puzzle Lecture 1: Asset pricing and the equity premium puzzle Simon Gilchrist Boston Univerity and NBER EC 745 Fall, 2013 Overview Some basic facts. Study the asset pricing implications of household portfolio

More information

OPTIONS, FUTURES, & OTHER DERIVATI

OPTIONS, FUTURES, & OTHER DERIVATI Fifth Edition OPTIONS, FUTURES, & OTHER DERIVATI John C. Hull Maple Financial Group Professor of Derivatives and Risk Manage, Director, Bonham Center for Finance Joseph L. Rotinan School of Management

More information

Contents. Bibliografische Informationen http://d-nb.info/996662502. digitalisiert durch

Contents. Bibliografische Informationen http://d-nb.info/996662502. digitalisiert durch Part I Methodology 1 Introduction 3 1.1 Basic Concepts. 3 1.2 Preliminary Examples 4 1.2.1 Vanilla Interest-Rate Swap 4 1.2.2 Cancellable Swap.. 5 1.2.3 Managing Credit Risk Collateral, Credit Default

More information

International Investments

International Investments 2008 AGI-Information Management Consultants May be used for personal purporses only or by libraries associated to dandelon.com network. International Investments Bruno Solnik H.E.C. SCHOOL of MANAGEMENT

More information

Asset Pricing. John H. Cochrane

Asset Pricing. John H. Cochrane Asset Pricing John H. Cochrane June 12, 2000 1 Acknowledgments This book owes an enormous intellectual debt to Lars Hansen and Gene Fama. Most of the ideas in the book developed from long discussions with

More information

Assessing Credit Risk for a Ghanaian Bank Using the Black- Scholes Model

Assessing Credit Risk for a Ghanaian Bank Using the Black- Scholes Model Assessing Credit Risk for a Ghanaian Bank Using the Black- Scholes Model VK Dedu 1, FT Oduro 2 1,2 Department of Mathematics, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana. Abstract

More information

DEPARTMENT OF BANKING AND FINANCE

DEPARTMENT OF BANKING AND FINANCE 202 COLLEGE OF BUSINESS DEPARTMENT OF BANKING AND FINANCE Degrees Offered: B.B., E.M.B.A., M.B., Ph.D. Chair: Chiu, Chien-liang ( 邱 建 良 ) The Department The Department of Banking and Finance was established

More information

Forwards, Swaps and Futures

Forwards, Swaps and Futures IEOR E4706: Financial Engineering: Discrete-Time Models c 2010 by Martin Haugh Forwards, Swaps and Futures These notes 1 introduce forwards, swaps and futures, and the basic mechanics of their associated

More information

On Black-Scholes Equation, Black- Scholes Formula and Binary Option Price

On Black-Scholes Equation, Black- Scholes Formula and Binary Option Price On Black-Scholes Equation, Black- Scholes Formula and Binary Option Price Abstract: Chi Gao 12/15/2013 I. Black-Scholes Equation is derived using two methods: (1) risk-neutral measure; (2) - hedge. II.

More information

CFA Examination PORTFOLIO MANAGEMENT Page 1 of 6

CFA Examination PORTFOLIO MANAGEMENT Page 1 of 6 PORTFOLIO MANAGEMENT A. INTRODUCTION RETURN AS A RANDOM VARIABLE E(R) = the return around which the probability distribution is centered: the expected value or mean of the probability distribution of possible

More information

TPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 2014 II + III

TPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 2014 II + III TPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 2014 II III Instructions 1. Only one problem should be treated on each sheet of paper and only one side of the sheet should be used. 2. The solutions folder

More information

Appendix B Weighted Average Cost of Capital

Appendix B Weighted Average Cost of Capital Appendix B Weighted Average Cost of Capital The inclusion of cost of money within cash flow analyses in engineering economics and life-cycle costing is a very important (and in many cases dominate) contributing

More information

Midterm Exam:Answer Sheet

Midterm Exam:Answer Sheet Econ 497 Barry W. Ickes Spring 2007 Midterm Exam:Answer Sheet 1. (25%) Consider a portfolio, c, comprised of a risk-free and risky asset, with returns given by r f and E(r p ), respectively. Let y be the

More information

15.401 Finance Theory

15.401 Finance Theory Finance Theory MIT Sloan MBA Program Andrew W. Lo Harris & Harris Group Professor, MIT Sloan School Lectures 10 11 11: : Options Critical Concepts Motivation Payoff Diagrams Payoff Tables Option Strategies

More information

London School of Economics FM423 - FT - 2008-9. Course Syllabus

London School of Economics FM423 - FT - 2008-9. Course Syllabus London School of Economics FM423 - FT - 2008-9 Department of Finance Vayanos - Yuan - Zachariadis Course Syllabus Course Description This is the core investments course in the MSc Finance Full-Time Programme.

More information

Overview. Option Basics. Options and Derivatives. Professor Lasse H. Pedersen. Option basics and option strategies

Overview. Option Basics. Options and Derivatives. Professor Lasse H. Pedersen. Option basics and option strategies Options and Derivatives Professor Lasse H. Pedersen Prof. Lasse H. Pedersen 1 Overview Option basics and option strategies No-arbitrage bounds on option prices Binomial option pricing Black-Scholes-Merton

More information

2. How is a fund manager motivated to behave with this type of renumeration package?

2. How is a fund manager motivated to behave with this type of renumeration package? MØA 155 PROBLEM SET: Options Exercise 1. Arbitrage [2] In the discussions of some of the models in this course, we relied on the following type of argument: If two investment strategies have the same payoff

More information

FIN 3710. Final (Practice) Exam 05/23/06

FIN 3710. Final (Practice) Exam 05/23/06 FIN 3710 Investment Analysis Spring 2006 Zicklin School of Business Baruch College Professor Rui Yao FIN 3710 Final (Practice) Exam 05/23/06 NAME: (Please print your name here) PLEDGE: (Sign your name

More information

CAPM, Arbitrage, and Linear Factor Models

CAPM, Arbitrage, and Linear Factor Models CAPM, Arbitrage, and Linear Factor Models CAPM, Arbitrage, Linear Factor Models 1/ 41 Introduction We now assume all investors actually choose mean-variance e cient portfolios. By equating these investors

More information

Index. Cambridge University Press 978-1-107-02922-4 - Finance: A Quantitative Introduction Nico Van Der Wijst. Index.

Index. Cambridge University Press 978-1-107-02922-4 - Finance: A Quantitative Introduction Nico Van Der Wijst. Index. 425 abnormal return, 118, 119 accounts payable, 21 accounts receivable, 21 actively managed funds, 46, 100, 114 adjusted present value and project values, 175, 176, 180 definition, 167 examples, 167 adverse

More information

Chapter 1: Financial Markets and Financial Derivatives

Chapter 1: Financial Markets and Financial Derivatives Chapter 1: Financial Markets and Financial Derivatives 1.1 Financial Markets Financial markets are markets for financial instruments, in which buyers and sellers find each other and create or exchange

More information

Markets and Banks. Stephen Kealhofer 5Oct11

Markets and Banks. Stephen Kealhofer 5Oct11 Markets and Banks Stephen Kealhofer 5Oct11 1 Outline Financial intermediation Characteristics of markets Prior versus current academic views Relationship of information vs liquidity trading Drivers of

More information

Average Debt and Equity Returns: Puzzling?

Average Debt and Equity Returns: Puzzling? Federal Reserve Bank of Minneapolis Research Department Staff Report 313 January 2003 Average Debt and Equity Returns: Puzzling? Ellen R. McGrattan Federal Reserve Bank of Minneapolis, University of Minnesota,

More information

The Master of Science in Finance (English Program) - MSF. Department of Banking and Finance. Chulalongkorn Business School. Chulalongkorn University

The Master of Science in Finance (English Program) - MSF. Department of Banking and Finance. Chulalongkorn Business School. Chulalongkorn University The Master of Science in Finance (English Program) - MSF Department of Banking and Finance Chulalongkorn Business School Chulalongkorn University Overview of Program Structure Full Time Program: 1 Year

More information

ASSET PRICING MODELS

ASSET PRICING MODELS ASSET PRICING MODELS 1 by Wayne E. Ferson Collins Chair in Finance Carroll School of Management, Boston College Fulton Hall 330B 140 Commonwealth Avenue Chestnut Hill, MA. 02467 (617) 552-6431 wayne.ferson@bc.edu

More information

PHD PROGRAM IN FINANCE COURSE PROGRAMME AND COURSE CONTENTS

PHD PROGRAM IN FINANCE COURSE PROGRAMME AND COURSE CONTENTS PHD PROGRAM IN FINANCE COURSE PROGRAMME AND COURSE CONTENTS I. Semester II. Semester FINC 601 Corporate Finance 8 FINC 602 Asset Pricing 8 FINC 603 Quantitative Methods in Finance 8 FINC 670 Seminar 4

More information

An Incomplete Market Approach to Employee Stock Option Valuation

An Incomplete Market Approach to Employee Stock Option Valuation An Incomplete Market Approach to Employee Stock Option Valuation Kamil Kladívko Department of Statistics, University of Economics, Prague Department of Finance, Norwegian School of Economics, Bergen Mihail

More information

FIN 500R Exam Answers. By nature of the exam, almost none of the answers are unique. In a few places, I give examples of alternative correct answers.

FIN 500R Exam Answers. By nature of the exam, almost none of the answers are unique. In a few places, I give examples of alternative correct answers. FIN 500R Exam Answers Phil Dybvig October 14, 2015 By nature of the exam, almost none of the answers are unique. In a few places, I give examples of alternative correct answers. Bubbles, Doubling Strategies,

More information

KENNETH R. FRENCH. Roth Family Distinguished Professor of Finance 85 Trescott Road Tuck School of Business at Dartmouth

KENNETH R. FRENCH. Roth Family Distinguished Professor of Finance 85 Trescott Road Tuck School of Business at Dartmouth KENNETH R. FRENCH August 2015 Preferred Address: Roth Family Distinguished Professor of Finance 85 Trescott Road Tuck School of Business at Dartmouth Etna, NH 03750 100 Tuck Hall Hanover, NH 03755-9000

More information

Market Efficiency and Behavioral Finance. Chapter 12

Market Efficiency and Behavioral Finance. Chapter 12 Market Efficiency and Behavioral Finance Chapter 12 Market Efficiency if stock prices reflect firm performance, should we be able to predict them? if prices were to be predictable, that would create the

More information

Financial Economics. Chris Jones is Senior Lecturer at the School of Economics at The Australian National University.

Financial Economics. Chris Jones is Senior Lecturer at the School of Economics at The Australian National University. Financial Economics Whilst many undergraduate finance textbooks are largely descriptive in nature the economic analysis in most graduate texts is too advanced for final year undergraduates. This book bridges

More information

Mid-Term Spring 2003

Mid-Term Spring 2003 Mid-Term Spring 2003 1. (1 point) You want to purchase XYZ stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3000 to invest, how many shares

More information

MSc Financial Economics - SH506 (Under Review)

MSc Financial Economics - SH506 (Under Review) MSc Financial Economics - SH506 (Under Review) 1. Objectives The objectives of the MSc Financial Economics programme are: To provide advanced postgraduate training in financial economics with emphasis

More information

OPTIONS and FUTURES Lecture 2: Binomial Option Pricing and Call Options

OPTIONS and FUTURES Lecture 2: Binomial Option Pricing and Call Options OPTIONS and FUTURES Lecture 2: Binomial Option Pricing and Call Options Philip H. Dybvig Washington University in Saint Louis binomial model replicating portfolio single period artificial (risk-neutral)

More information

Option Values. Determinants of Call Option Values. CHAPTER 16 Option Valuation. Figure 16.1 Call Option Value Before Expiration

Option Values. Determinants of Call Option Values. CHAPTER 16 Option Valuation. Figure 16.1 Call Option Value Before Expiration CHAPTER 16 Option Valuation 16.1 OPTION VALUATION: INTRODUCTION Option Values Intrinsic value - profit that could be made if the option was immediately exercised Call: stock price - exercise price Put:

More information

Master of Business Administration Program in the Faculty of Business Administration and Economics

Master of Business Administration Program in the Faculty of Business Administration and Economics Master of Business Administration Program in the Faculty of Business Administration and Economics The Faculty of Business Administration and Economics at Haigazian University offers a degree program leading

More information

BACHELOR OF SCIENCE WITH A MAJOR IN FINANCE

BACHELOR OF SCIENCE WITH A MAJOR IN FINANCE BACHELOR OF SCIENCE WITH A MAJOR IN FINANCE Emphasizing a finance-focused education, the Bachelor of Science with a Major in Finance degree program directly targets the financial industry including commercial

More information

Master of Business Administration Program in the Faculty of Business Administration and Economics

Master of Business Administration Program in the Faculty of Business Administration and Economics Master of Business Administration Program in the Faculty of Business Administration and Economics The Faculty of Business Administration and Economics at Haigazian University offers a degree program leading

More information

Review for Exam 2. Instructions: Please read carefully

Review for Exam 2. Instructions: Please read carefully Review for Exam 2 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems You are not responsible for any topics that are not covered in the lecture note

More information

Arbitrage-Free Pricing Models

Arbitrage-Free Pricing Models Arbitrage-Free Pricing Models Leonid Kogan MIT, Sloan 15.450, Fall 2010 c Leonid Kogan ( MIT, Sloan ) Arbitrage-Free Pricing Models 15.450, Fall 2010 1 / 48 Outline 1 Introduction 2 Arbitrage and SPD 3

More information

Futures Price d,f $ 0.65 = (1.05) (1.04)

Futures Price d,f $ 0.65 = (1.05) (1.04) 24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding

More information

Asset Management Contracts and Equilibrium Prices

Asset Management Contracts and Equilibrium Prices Asset Management Contracts and Equilibrium Prices ANDREA M. BUFFA DIMITRI VAYANOS PAUL WOOLLEY Boston University London School of Economics London School of Economics September, 2013 Abstract We study

More information

CONSUMPTION-BASED ASSET PRICING

CONSUMPTION-BASED ASSET PRICING Chapter 13 CONSUMPTION-BASED ASSET PRICING JOHN Y. CAMPBELL Harvard University and NBER Contents Abstract 802 Keywords 802 1. Introduction 803 2. International stock market data 808 3. The equity premium

More information

Financial Options: Pricing and Hedging

Financial Options: Pricing and Hedging Financial Options: Pricing and Hedging Diagrams Debt Equity Value of Firm s Assets T Value of Firm s Assets T Valuation of distressed debt and equity-linked securities requires an understanding of financial

More information

M.I.T. Spring 1999 Sloan School of Management 15.415. First Half Summary

M.I.T. Spring 1999 Sloan School of Management 15.415. First Half Summary M.I.T. Spring 1999 Sloan School of Management 15.415 First Half Summary Present Values Basic Idea: We should discount future cash flows. The appropriate discount rate is the opportunity cost of capital.

More information

CS 522 Computational Tools and Methods in Finance Robert Jarrow Lecture 1: Equity Options

CS 522 Computational Tools and Methods in Finance Robert Jarrow Lecture 1: Equity Options CS 5 Computational Tools and Methods in Finance Robert Jarrow Lecture 1: Equity Options 1. Definitions Equity. The common stock of a corporation. Traded on organized exchanges (NYSE, AMEX, NASDAQ). A common

More information

DERIVATIVE SECURITIES Lecture 2: Binomial Option Pricing and Call Options

DERIVATIVE SECURITIES Lecture 2: Binomial Option Pricing and Call Options DERIVATIVE SECURITIES Lecture 2: Binomial Option Pricing and Call Options Philip H. Dybvig Washington University in Saint Louis review of pricing formulas assets versus futures practical issues call options

More information

Bonds, Preferred Stock, and Common Stock

Bonds, Preferred Stock, and Common Stock Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1-year discount bond with a $100 face value. What is the most the investor would pay for 2. An

More information

Call Price as a Function of the Stock Price

Call Price as a Function of the Stock Price Call Price as a Function of the Stock Price Intuitively, the call price should be an increasing function of the stock price. This relationship allows one to develop a theory of option pricing, derived

More information

Excess Volatility and Closed-End Fund Discounts

Excess Volatility and Closed-End Fund Discounts Excess Volatility and Closed-End Fund Discounts Michael Bleaney School of Economics University of Nottingham Nottingham NG7 RD, U.K. Tel. (+44) 115 951 5464 Fax (+44) 115 951 4159 e-mail: michael.bleaney@nottingham.ac.uk

More information

School Of Finance - A Review

School Of Finance - A Review DESCRIPTION FOR MASTER OF FINANCE COURSES OFFERED BY SCHOOL OF ECONOMICS AND FINANCE Advanced Corporate Finance* This course is aimed to give students a solid understanding of theoretical and empirical

More information

CONTENTS. List of Figures List of Tables. List of Abbreviations

CONTENTS. List of Figures List of Tables. List of Abbreviations List of Figures List of Tables Preface List of Abbreviations xiv xvi xviii xx 1 Introduction to Value at Risk (VaR) 1 1.1 Economics underlying VaR measurement 2 1.1.1 What is VaR? 4 1.1.2 Calculating VaR

More information

Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator

Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights

More information

Models of Risk and Return

Models of Risk and Return Models of Risk and Return Aswath Damodaran Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for

More information

Pensions: A Corporate Finance Perspective. Economics of pensions. Corporate pension finance

Pensions: A Corporate Finance Perspective. Economics of pensions. Corporate pension finance Pensions: A Corporate Finance Perspective Presentation by Zvi Bodie at the Seminar on Pension Finance and Economics June 11, 2004, Staple Inn, London Economics of pensions The primary function of pension

More information

Long Run Risks, Credit Markets, and Financial Structure

Long Run Risks, Credit Markets, and Financial Structure American Economic Review: Papers & Proceedings 100 (May 2010): 547 551 http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.2.547 Long Run Risks, Credit Markets, and Financial Structure By Harjoat S.

More information

Introduction to Equity Derivatives

Introduction to Equity Derivatives Introduction to Equity Derivatives Aaron Brask + 44 (0)20 7773 5487 Internal use only Equity derivatives overview Products Clients Client strategies Barclays Capital 2 Equity derivatives products Equity

More information

C(t) (1 + y) 4. t=1. For the 4 year bond considered above, assume that the price today is 900$. The yield to maturity will then be the y that solves

C(t) (1 + y) 4. t=1. For the 4 year bond considered above, assume that the price today is 900$. The yield to maturity will then be the y that solves Economics 7344, Spring 2013 Bent E. Sørensen INTEREST RATE THEORY We will cover fixed income securities. The major categories of long-term fixed income securities are federal government bonds, corporate

More information

Review for Exam 2. Instructions: Please read carefully

Review for Exam 2. Instructions: Please read carefully Review for Exam Instructions: Please read carefully The exam will have 1 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation questions.

More information

UNCERTAINTY IN THE ELECTRIC POWER INDUSTRY Methods and Models for Decision Support

UNCERTAINTY IN THE ELECTRIC POWER INDUSTRY Methods and Models for Decision Support UNCERTAINTY IN THE ELECTRIC POWER INDUSTRY Methods and Models for Decision Support CHRISTOPH WEBER University of Stuttgart, Institute for Energy Economics and Rational of Use of Energy fyj. Springer Contents

More information

Introduction to Mathematical Finance

Introduction to Mathematical Finance Introduction to Mathematical Finance Martin Baxter Barcelona 11 December 2007 1 Contents Financial markets and derivatives Basic derivative pricing and hedging Advanced derivatives 2 Banking Retail banking

More information

AFM 472. Midterm Examination. Monday Oct. 24, 2011. A. Huang

AFM 472. Midterm Examination. Monday Oct. 24, 2011. A. Huang AFM 472 Midterm Examination Monday Oct. 24, 2011 A. Huang Name: Answer Key Student Number: Section (circle one): 10:00am 1:00pm 2:30pm Instructions: 1. Answer all questions in the space provided. If space

More information

Notes on Black-Scholes Option Pricing Formula

Notes on Black-Scholes Option Pricing Formula . Notes on Black-Scholes Option Pricing Formula by De-Xing Guan March 2006 These notes are a brief introduction to the Black-Scholes formula, which prices the European call options. The essential reading

More information

Schonbucher Chapter 9: Firm Value and Share Priced-Based Models Updated 07-30-2007

Schonbucher Chapter 9: Firm Value and Share Priced-Based Models Updated 07-30-2007 Schonbucher Chapter 9: Firm alue and Share Priced-Based Models Updated 07-30-2007 (References sited are listed in the book s bibliography, except Miller 1988) For Intensity and spread-based models of default

More information

The Impact of Credit Risk and Implied Volatility on Stock Returns

The Impact of Credit Risk and Implied Volatility on Stock Returns The Impact of Credit Risk and Implied Volatility on Stock Returns Florian Steiger 1 Working Paper, May 2010 JEL Classification: G10, G12, G17 Abstract: This paper examines the possibility of using derivative-implied

More information

Cost of Capital Presentation for ERRA Tariff Committee Dr. Konstantin Petrov / Waisum Cheng / Dr. Daniel Grote April 2009 Experience you can trust.

Cost of Capital Presentation for ERRA Tariff Committee Dr. Konstantin Petrov / Waisum Cheng / Dr. Daniel Grote April 2009 Experience you can trust. Cost of Capital Presentation for ERRA Tariff Committee Dr. Konstantin Petrov / Waisum Cheng / Dr. Daniel Grote April 2009 Experience you can trust. Agenda 1.Definition of Cost of Capital a) Concept and

More information

Modeling correlated market and credit risk in fixed income portfolios

Modeling correlated market and credit risk in fixed income portfolios Journal of Banking & Finance 26 (2002) 347 374 www.elsevier.com/locate/econbase Modeling correlated market and credit risk in fixed income portfolios Theodore M. Barnhill Jr. a, *, William F. Maxwell b

More information

Part V: Option Pricing Basics

Part V: Option Pricing Basics erivatives & Risk Management First Week: Part A: Option Fundamentals payoffs market microstructure Next 2 Weeks: Part B: Option Pricing fundamentals: intrinsic vs. time value, put-call parity introduction

More information

The CAPM (Capital Asset Pricing Model) NPV Dependent on Discount Rate Schedule

The CAPM (Capital Asset Pricing Model) NPV Dependent on Discount Rate Schedule The CAPM (Capital Asset Pricing Model) Massachusetts Institute of Technology CAPM Slide 1 of NPV Dependent on Discount Rate Schedule Discussed NPV and time value of money Choice of discount rate influences

More information

The Equity Risk Premium and the Cost of Capital

The Equity Risk Premium and the Cost of Capital CEEPR Workshop Cambridge, MA May 2006 The Equity Risk Premium and the Cost of Capital John E. Parsons Center for Energy and Environmental Policy Research Outline Building Blocks of the Cost of Capital:

More information

Total Credits: 30 credits are required for master s program graduates and 51 credits for undergraduate program.

Total Credits: 30 credits are required for master s program graduates and 51 credits for undergraduate program. Middle East Technical University Graduate School of Social Sciences Doctor of Philosophy in Business Administration In the Field of Accounting-Finance Aims: The aim of Doctor of Philosphy in Business Administration

More information

Degrees. Related Experience. Affiliations GEORGE M. CONSTANTINIDES. May 2010

Degrees. Related Experience. Affiliations GEORGE M. CONSTANTINIDES. May 2010 Leo Melamed Professor of Finance The University of Chicago Booth School of Business 5807 South Woodlawn Avenue, Chicago, Illinois 60637 tel (773) 702-7258 fax (773) 753-8045 email: gmc@chicagobooth.edu

More information

Caps and Floors. John Crosby

Caps and Floors. John Crosby Caps and Floors John Crosby Glasgow University My website is: http://www.john-crosby.co.uk If you spot any typos or errors, please email me. My email address is on my website Lecture given 19th February

More information

Option Premium = Intrinsic. Speculative Value. Value

Option Premium = Intrinsic. Speculative Value. Value Chapters 4/ Part Options: Basic Concepts Options Call Options Put Options Selling Options Reading The Wall Street Journal Combinations of Options Valuing Options An Option-Pricing Formula Investment in

More information

Lecture 6: Arbitrage Pricing Theory

Lecture 6: Arbitrage Pricing Theory Lecture 6: Arbitrage Pricing Theory Investments FIN460-Papanikolaou APT 1/ 48 Overview 1. Introduction 2. Multi-Factor Models 3. The Arbitrage Pricing Theory FIN460-Papanikolaou APT 2/ 48 Introduction

More information

Term Structure of Interest Rates

Term Structure of Interest Rates Term Structure of Interest Rates Ali Umut Irturk 789139-3 Survey submitted to the Economics Department of the University of California, Santa Barbara in fulfillment of the requirement for M.A. Theory of

More information

The Risk-Free Rate s Impact on Stock Returns with Representative Fund Managers

The Risk-Free Rate s Impact on Stock Returns with Representative Fund Managers School of Economics and Management Department of Business Administration FEKN90 Business Administration- Degree Project Master of Science in Business and Economics Spring term of 2013 The Risk-Free Rate

More information