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- Product code: 14334
- ISBN: 069109022X,
ISBN13: 9780691090221,
486 pages, hardback
Published by Princeton University Press on 2001
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Description of Dynamic Asset Pricing Theory |
This is a thoroughly updated edition of Dynamic Asset Pricing Theory, the standard text for doctoral students and researchers on the theory of asset pricing and portfolio selection in multiperiod settings under uncertainty. The asset pricing results are based on the three increasingly restrictive assumptions: absence of arbitrage, single-agent optimality, and equilibrium. These results are unified with two key concepts, state prices and martingales.
Technicalities are given relatively little emphasis, so as to draw connections between these concepts and to make plain the similarities between discrete and continuous-time models.
Readers will be particularly intrigued by this latest edition's most significant new feature: a chapter on corporate securities that offers alternative approaches to the valuation of corporate debt. Also, while much of the continuous-time portion of the theory is based on Brownian motion, this third edition introduces jumps - for example, those associated with Poisson arrivals - in order to accommodate surprise events such as bond defaults.
Applications include term-structure models, derivative valuation, and hedging methods. Numerical methods covered include Monte Carlo simulation and finite-difference solutions for partial differential equations. Each chapter provides extensive problem exercises and notes to the literature.
A system of appendixes reviews the necessary mathematical concepts. And references have been updated throughout. With this new edition, Dynamic Asset Pricing Theory remains at the head of the field.
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Reviews"This is an important addition to the set of text/reference books on asset pricing theory. It will, if it has not already, become the standard text for the second Ph.D. course in security markets. Its treatment of contingent claim valuation, in particular, is unrivaled in its breadth and coherence."
- Journal of Economic Literature
| Contents of Dynamic Asset Pricing Theory |
Preface
PART I: DISCRETE-TIME MODELS
1. Introduction to State Pricing
A. Arbitrage and State Prices
B. Risk-Neutral Probabilities
C. Optimality and Asset Pricing
D. Efficiency and Complete Markets
E. Optimality and Representative Agents
F. State-Price Beta Models
Exercises
Notes
2. The Basic Multiperiod Model
A. Uncertainty 21 B Security Markets
C. Arbitrage, State Prices, and Martingales
D. Individual Agent Optimality
E. Equilibrium and Pareto Optimality
F. Equilibrium Asset Pricing
G. Arbitrage and Martingale Measures
H. Valuation of Redundant Securities
I. American Exercise Policies and Valuation
J. Is Early Exercise Optimal?
Exercises
Notes
3. The Dynamic Programming Approach
A. The Bellman Approach
B. First-Order Bellman Conditions
C. Markov Uncertainty
D. Markov Asset Pricing
E. Security Pricing by Markov Control
F. Markov Arbitrage-Free Valuation
G Early Exercise and Optimal Stopping
Exercises
Notes
4. The Infinite-Horizon Setting
A. Markov Dynamic Programming
B. Dynamic Programming and Equilibrium
C. Arbitrage and State Prices
D. Optimality and State Prices
E. Method-of-Moments Estimation
Exercises
Notes
PART II: CONTINUOUS-TIME MODELS
5. The Black-Scholes Model
A. Trading Gains for Brownian Prices
B. Martingale Trading Gains
C. Ito Prices and Gains
D. Ito's Formula
E. The Black-Scholes Option-Pricing Formula
F. Black-Scholes Formula: First Try
G. The PDE for Arbitrage-Free Prices
H. The Feynman-Kac Solution
I. The Multidimensional Case
Exercises
Notes
6. State Prices and Equivalent Martingale Measures
A. Arbitrage
B. Numeraire Invariance
C. State Prices and Doubling Strategies
D. Expected Rates of Return
E. Equivalent Martingale Measures
F. State Prices and Martingale Measures
G. Girsanov and Market Prices of Risk
H. Black-Scholes Again
I. Complete Markets
J. Redundant Security Pricing
K. Martingale Measures from No Arbitrage
L. Arbitrage Pricing with Dividends
M. Lumpy Dividends and Term Structures
N. Martingale Measures, Infinite Horizon
Exercises
Notes
7. Term-Structure Models
A. The Term Structure
B. One-Factor Term-Structure Models
C. The Gaussian Single-Factor Models
D. The Cox-Ingersoll-Ross Model
E. The Affine Single-Factor Models
F. Term-Structure Derivatives
G. The Fundamental Solution
H. Multifactor Models
1. Affine Term-Structure Models
J. The HJM Model of Forward Rates
K. Markovian Yield Curves and SPDEs
Exercises
Notes
8. Derivative Pricing
A. Martingale Measures in a Black Box
B. Forward Prices
C. Futures and Continuous Resettlement
D. Arbitrage-Free Futures Prices
E. Stochastic Volatility
F. Option Valuation by Transform Analysis
G. American Security Valuation
H. American Exercise Boundaries
1. Lookback Options
Exercises
Notes
9. Portfolio and Consumption Choice
A. Stochastic Control
B. Merton's Problem
C. Solution to Merton's Problem
D. The Infinite-Horizon Case
E. The Martingale Formulation
F. Martingale Solution
G. A Generalization
H. The Utility-Gradient Approach
Exercises
Notes
10. Equilibrium
A. The Primitives
B. Security-Spot Market Equilibrium
C. Arrow-Debreu Equilibrium
D. Implementing Arrow-Debreu Equilibrium
E. Real Security Prices
F. Optimality with Additive Utility
G. Equilibrium with Additive Utility
H. The Consumption-Based CAPM
I. The CIR Term Structure
J. The CCAPM in Incomplete Markets
Exercises
Notes
11. Corporate Securities
A. The Black-Scholes-Merton Model
B. Endogenous Default Timing
C. Example: Brownian Dividend Growth
D. Taxes and Bankruptcy Costs
E. Endogenous Capital Structure
F. Technology Choice
G. Other Market Imperfections
H. Intensity-Based Modeling of Default
I. Risk-Neutral Intensity Process
J. Zero-Recovery Bond Pricing
K. Pricing with Recovery at Default
L. Default-Adjusted Short Rate
Exercises
Notes
12. Numerical Methods
A. Central Limit Theorems
B. Binomial to Black-Scholes
C. Binomial Convergence for Unbounded Derivative Payoffs
D. Discretization of Asset Price Processes
E. Monte Carlo Simulation
F. Efficient SDE Simulation
G. Applying Feynman-Kac
H. Finite-Difference Methods
I. Term-Structure Example
J. Finite-Difference Algorithms with Early Exercise Options
K. The Numerical Solution of State Prices
L. Numerical Solution of the Pricing Semi-Group
M. Fitting the Initial Term Structure
Exercises
Notes
APPENDIXES
A. Finite-State Probability
B. Separating Hyperplanes and Optimality
C. Probability
D. Stochastic Integration
E. SDE, PDE, and Feynman-Kac
F. Ito's Formula with jumps
G. Utility Gradients
H. Ito's Formula for Complex Functions
I. Counting Processes
J. Finite-Difference Code
Bibliography
Symbol Glossary
Author Index
Subject Index
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About Darrell Duffie |
Darrell Duffie is the James Irvin Miller Professor of Finance at the Graduate School of Business, Stanford University. He teaches and does research in the area of asset valuation, risk management, credit risk modeling, and fixed-income and equity markets. His other books include Security Markets: Stochastic Models and Futures Markets.
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