Financial Asset Pricing Theory

• Comprehensive and unified presentation of modern asset pricing theory. Ideal main textbook for courses where the required readings often consists of a long list of research articles with varying focus, notation, and writing style
• Covers recent developments in asset pricing research. These state-of-the-art models are likely to be the basis of future practical applications and of future theoretical advances
• A balanced presentation that offers both formal mathematical modelling and economic intuition and understanding
• Each chapter includes a set of exercises making it easy for readers to test their knowledge
• Divided into chapters according to economic concepts and theories. This enables the reader to take the intuition and simplicity from one-period and discrete-time settings to a more mathematically demanding continuous-time setting

Financial Asset Pricing Theory offers a comprehensive overview of the classic and the current research in theoretical asset pricing. Asset pricing is developed around the concept of a state-price deflator which relates the price of any asset to its future (risky) dividends and thus incorporates how to adjust for both time and risk in asset valuation. The willingness of any utility-maximizing investor to shift consumption over time defines a state-price deflator which provides a link between optimal consumption and asset prices that leads to the Consumption-based Capital Asset Pricing Model (CCAPM). A simple version of the CCAPM cannot explain various stylized asset pricing facts, but these asset pricing 'puzzles' can be resolved by a number of recent extensions involving habit formation, recursive utility, multiple consumption goods, and long-run consumption risks. Other valuation techniques and modelling approaches (such as factor models, term structure models, risk-neutral valuation, and option pricing models) are explained and related to state-price deflators. 

The book will serve as a textbook for an advanced course in theoretical financial economics in a PhD or a quantitative Master of Science program. It will also be a useful reference book for researchers and finance professionals. The presentation in the book balances formal mathematical modelling and economic intuition and understanding. Both discrete-time and continuous-time models are covered. The necessary concepts and techniques concerning stochastic processes are carefully explained in a separate chapter so that only limited previous exposure to dynamic finance models is required.

Readership: First and second year PhD students in finance and economics, researchers, and finance professionals.