Asset Pricing and Portfolio. Choice Theory SECOND EDITION. Kerry E. Back

Transcription

1 Asset Pricing and Portfolio Choice Theory SECOND EDITION Kerry E. Back

2 Preface to the First Edition xv Preface to the Second Edition xvi Asset Pricing and Portfolio Puzzles xvii PART ONE Single-Period Models 1. Utility and Risk Aversion Utility Functions and Risk Aversion Certainty Equivalents and Second-Order Risk Aversion Linear Risk Tolerance Utility and Wealth Moments Risk Aversion for Increments to Random Wealth Notes and References Portfolio Choice First-Order Condition Single Risky Asset Multiple Risky Assets CARA-Normal Model Mean-Variance Preferences Linear Risk Tolerance and Wealth Expansion Paths Beginning-of-Period Consumption Notes and References Stochastic Discount Factors Basic Relationships Regarding SDFs Arbitrage, the Law of One Price, and Existence of SDFs Complete Markets and Uniqueness of the SDF Risk-Neutral Probahiiities Orthogonal Protections of SDFs onto the Asset Span Hansen-Jagannathan Bounds Hedging and Optimal Portfolios with Quadratic Utility 70

3 viii CONTENTS 3.8. Hilbert Spaces and Gram-Schmidt Orthogonalization Notes and References Equilibrium and Efficiency Pareto Optima Competitive Equilibria Complete Markets Aggregation and Efficiency with Linear Risk Tolerance Beginning-of-Period Consumption Notes and References Mean-Variance Analysis Graphical Analysis Mean-Variance Frontier of Risky Assets Mean-Variance Frontier with a Risk-Free Asset Orthogonal Projections and Frontier Returns Frontier Returns and Stochastic Discount Factors Separating Distributions Notes and References Factor Models Capital Asset Pricing Model General Factor Models Jensens Alpha and Performance Evaluation Statistical Factors Arbitrage Pricing Theory Empirical Performance of Populär Models Notes and References Representative Investors Pareto Optimality Implies a Representative Investor Linear Risk Tolerance Consumption-Based Asset Pricing Coskewness-Cokurtosis Pricing Model Rubinstein Option Pricing Model Notes and References 175 PART TWO Dynamic Models 8. Dynamic Securities Markets Portfolio Choice Model 184

4 CONTENTS ix 8.2. Stochastic Discount Factor Processes Arbitrage and the Law of One Price Complete Markets Bubbles, Transvers ality Conditions, and Ponzi S ehernes Inflation and Foreign Exchange Notes and References Dynamic Portfolio Choice Euler Equation Static Approach in Complete Markets Orthogonal Protections for Quadratic Utility Introduction to Dynamic Programming Dynamic Programming for Portfolio Choice CRRA Utility with HD Returns Notes and References Dynamic Asset Pricing CAPM, CCAPM, and ICAPM Testing Conditional Models Competitive Equilibria Gordon Model and Representative Investors Campbell-Shiller Linearization Risk-Neutral Probabilities Notes and References Explaining Puzzles Extemal Habits Rare Disasters Epstein-Zin-Weil Utility Long-Run Risks Uninsurable Labor Income Risk Notes and References Brownian Motion and Stochastic Calculus Brownian Motion Ito Integral and Itö Processes Martingale Representation Itos Formula Geometrie Brownian Motion Covariation of Ito Processes and General Itos Formula 305

5 12.7. Conditional Variances and Covariances Transformations of Models Notes and References Continuous-Time Markets AssetPrice Dynamics Intertemporal Budget Constraint Stochastic Discount Factor Processes Valuation via SDF Processes Complete Markets Markovian Model Real and Nominal SDFs and Interest Rates Notes and References Continuous-Time Portfolio Choice and Pricing Euler Equation Representative Investor Pricing Static Approach to Portfolio Choice Introduction to Dynamic Programming Markovian Portfolio Choice CCAPM, ICAPM, and CAPM Notes and References Continuous-Time Topics Fundamental Partial Differential Equation Fundamental PDF and Optimal Portfolio Risk-Neutral Probahiiities Jump Risks Internal Habits Verification Theorem Notes and References 390 PART THREE Derivative Securities 16. Option Pricing Uses of Options and Put-Call Parity "No Arbitrage" Assumptions Changing Probahiiities Black-Scholes Formula Fundamental Partial Differential Equation 413

6 CONTENTS xi Delta Hedging and Greeks American Options and Smooth Pasting Dividends Notes and References Forwards, Futures, and More Option Pricing Forward Measures Forwards and Futures Margrabe, Black, and Merton Formulas Implied and Local Volatilities StochasticVolatility Notes and References Term Structure Models Forward Rates Factor Models and the Fundamental PDE Affine Models Quadratic Models Expectations Hypotheses Fitting the Yield Curve and HJM Models Notes and References Perpetual Options and the Leland Model Perpetual Options More Time-Independent Derivatives Perpetual Debt with Endogenous Default Optimal Stahe Capital Structure Optimal Dynamic Capital Structure Finite Maturity Debt Notes and References Real Options and q Theory An Indivisible Investment Project q Theory Irreversible Investment as a Series of Real Options Dynamic Programming for Irreversible Investment Irreversible Investment and Perfect Competition Berk-Green-Naik Model Notes and References 546

7 xu CONTENTS PART FOUR Beliefs, Information, and Preferences 21. Heterogeneous Beliefs State-Dependent Utility Formulation Aggregation in Single-Period Markets Aggregation in Dynamic Markets Short Sales Constraints and Overpricing Speculative Trade and Bubbles Notes and References Rational Expectations Equilibria No-Trade Theorem Normal-Normal Updating Fully Revealing Equilibria Grossman-Stiglitz Model Hellwig Model Notes and References Leaming Estimating an Unknown Drift Portfolio Choice with an Unknown Expected Return More Filtering Theory Learning Expected Consumption Growth A Regime-Switching Model Notes and References Information, Strategie Trading, and Liquidity Glosten-Milgrom Model Kyle Model Glosten Model of Limit Order Markets Auctions Continuous-Time Kyle Model Notes and References Alternative Preferences Experimental Paradoxes Betweenness Preferences Rank-Dependent Preferences First-Order Risk Aversion AmbiguityAversion Notes and References 673

8 CONTENTS xiii Appendices A. Some Probability and Stochastic Process Theory 679 A.l. Random Variables 679 A.2. Probabilities 680 A.3. Distribution Functions and Densities 681 A.4. Expectations 681 A.5. Convergence of Expectations 682 A.6. Interchange of Differentiation and Expectation 683 A.7. Random Vectors 684 A.8. Conditioning 685 A.9. Independence 686 A.10. Equivalent Probability Measures 687 A.ll. Filtrations, Martingales, and Stopping Times 688 A. 12. Martingales under Equivalent Measures 688 A.D. Local Martingales 689 A.14. The Usual Conditions 690 Bibliography 691 Index 715