Acknowledgments v Preface xiii Part I. Asset Pricing Theory 3 1 Consumption-Based Model and Overview 5 1.1 Basic Pricing Equation 6 1.2 Marginal Rate of Substitution/Stochastic Discount Factor 8 1.3 Prices, Payoffs, and Notation 10 1.4 Classic Issues in Finance 12 1.5 Discount Factors in Continuous Time 28 Problems 33 2 Applying the Basic Model 37 2.1 Assumptions and Applicability 37 2.
2 General Equilibrium 39 2.3 Consumption-Based Model in Practice 44 2.4 Alternative Asset Pricing Models: Overview 46 Problems 48 3 Contingent Claims Markets 51 3.1 Contingent Claims 51 3.2 Risk-Neutral Probabilities 53 3.3 Investors Again 54 3.4 Risk Sharing 56 3.5 State Diagram and Price Function 58 4 The Discount Factor 63 4.
1 Law of One Price and Existence of a Discount Factor 64 4.2 No Arbitrage and Positive Discount Factors 69 4.3 An Alternative Formula, and x* in Continuous Time 74 Problems 77 5 Mean-Variance Frontier and Beta Representations 79 5.1 Expected Return-Beta Representations 80 5.2 Mean-Variance Frontier: Intuition and Lagrangian Characterization 83 5.3 An Orthogonal Characterization of the Mean-Variance Frontier 86 5.4 Spanning the Mean-Variance Frontier 91 5.5 A Compilation of Properties of R*, R e *, and x* 92 5.
6 Mean-Variance Frontiers for m: The Hansen-Jagannathan Bounds 95 Problems 100 6 Relation between Discount Factors, Betas, and Mean-Variance Frontiers 101 6.1 From Discount Factors to Beta Representations 102 6.2 From Mean-Variance Frontier to a Discount Factor and Beta Representation 105 6.3 Factor Models and Discount Factors 108 6.4 Discount Factors and Beta Models to Mean-Variance Frontier 112 6.5 Three Risk-Free Rate Analogues 113 6.6 Mean-Variance Special Cases with No Risk-Free Rate 119 Problems 122 7 Implications of Existence and Equivalence Theorems 123 8 Conditioning Information 133 8.1 Scaled Payoffs 134 8.
2 Sufficiency of Adding Scaled Returns 136 8.3 Conditional and Unconditional Models 138 8.4 Scaled Factors: A Partial Solution 146 8.5 Summary 148 Problems 148 9 Factor Pricing Models 149 9.1 Capital Asset Pricing Model (CAPM) 152 9.2 Intertemporal Capital Asset Pricing Model (ICAPM) 166 9.3 Comments on the CAPM and ICAPM 168 9.4 Arbitrage Pricing Theory (APT) 173 9.
5 APT vs. ICAPM 183 Problems 184 Part II. Estimating and Evaluating Asset Pricing Models 185 10 GMM in Explicit Discount Factor Models 189 10.1 The Recipe 190 10.2 Interpreting the GMM Procedure 192 10.3 Applying GMM 196 11 GMM: General Formulas and Applications 201 11.1 General GMM Formulas 202 11.2 Testing Moments 206 11.
3 Standard Errors of Anything by Delta Method 207 11.4 Using GMM for Regressions 208 11.5 Prespecified Weighting Matrices and Moment Conditions 210 11.6 Estimating on One Group of Moments, Testing on Another 219 11.7 Estimating the Spectral Density Matrix 220 Problems 228 12 Regression-Based Tests of Linear Factor Models 229 12.1 Time-Series Regressions 230 12.2 Cross-Sectional Regressions 235 12.3 Fama-MacBeth Procedure 244 Problems 251 13 GMM for Linear Factor Models in Discount Factor Form 253 13.
1 GMM on the Pricing Errors Gives a Cross-Sectional Regression 253 13.2 The Case of Excess Returns 256 13.3 Horse Races 258 13.4 Testing for Characteristics 259 13.5 Testing for Priced Factors: Lambdas or b''s? 260 Problems 264 14 Maximum Likelihood 265 14.1 Maximum Likelihood 265 14.2 ML is GMM on the Scores 268 14.3 When Factors are Returns, ML Prescribes a Time-Series Regression 270 14.
4 When Factors are Not Excess Returns, Regression ML Prescribes a Cross-Sectional 273 Problems 275 15 Time Series, Cross-Section, and GMM/DF Tests of Linear Factor Models 277 15.1 Three Approaches to the CAPM in Size Portfolios 278 15.2 Monte Carlo and Bootstrap 285 16 Which Method? 291 Part III. Bonds and Options 307 17 Option Pricing 311 17.1 Background 311 17.2 Black-Scholes Formula 318 Problems 324 18 Option Pricing without Perfect Replication 325 18.1 On the Edges of Arbitrage 325 18.2 One-Period Good-Deal Bounds 327 18.
3 Multiple Periods and Continuous Time 334 18.4 Extensions, Other Approaches, and Bibliography 344 Problems 346 19 Term Structure of Interest Rates 347 19.1 Definitions and Notation 347 19.2 Yield Curve and Expectations Hypothesis 352 19.3 Term Structure Models--A Discrete-Time Introduction 355 19.4 Continuous-Time Term Structure Models 360 19.5 Three Linear Term Structure Models 366 19.6 Bibliography and Comments 377 Problems 380 Part IV.
Empirical Survey 383 20 Expected Returns in the Time Series and Cross Section 387 20.1 Time-Series Predictability 389 20.2 The Cross Section: CAPM and Multifactor Models 434 20.3 Summary and Interpretation 448 Problems 453 21 Equity Premium Puzzle and Consumption-Based Models 455 21.1 Equity Premium Puzzles 456 21.2 New Models 465 21.3 Bibliography 481 Problems 484 Part V. Appendix 487 Appendix.
Continuous Time 489 A.1 Brownian Motion 489 A.2 Diffusion Model 491 A.3 Ito''s Lemma 494 Problems 495 References 497 Author Index 511 Subject Index 515.