Finance and the economics of uncertainty

Gabrielle Demange and Guy Laroque

BLACKWELL PUBLISHING，2006

296页

Contents
List of main symbols x
Introduction 1
Part 1 Valuation by Arbitrage 7
1 Financial instruments:an introduction 9
1 Money,Bond,and Stock Markets 10
1.1 Money Markets 10
1.2 Bonds 10
1.3 The Spot Curve 13
1.4 Stocks 15
2 Derivatives Markets 16
2.1 Futures Markets for Commodities and Currencies 17
2.2 Futures Markets for Financial Instruments 21
2.3 Options 25
Bibliographical Note 27
Exercises 27
2 Arbitrage 28
1 Static Arbitrage 29
1.1 States of Nature 29
1.2 Securities 29
1.3 Absence of Arbitrage Opportunities and Valuation 32
1.4 Complete Markets 36
1.5 Risk-Adjusted Probability 38
2 Intertemporal Arbitrage 39
2.1 Time Structure 39
2.2 Instantaneous Arbitrage 40
2.3 Dynamic Arbitrage 41
2.4 Probabilistic Formulation:Risk-Adjusted Probability 50
Bibliographical Note 52
Exercises 52
Part 2 Exchanging Risk 57
1 The Model with Certainty 59
1.1 Individual Demand for Savings 59
1.2 Equilibrium,Optimum 63
2 Introducing Uncertainty 65
Bibliographical Note 66
3 Investors and their information 69
1 Choice Criteria 70
1.1 Von Neumann Morgenstern Utility and Risk Aversion 71
1.2 Standard von Neumann Morgenstern Utility Functions 73
2 The Investor’s Choice 74
2.1 Markets and Budget Constraints 74
2.2 The Demand for One Risky Security and Risk Aversion 77
3 Subjective Expectations and Opportunities for Arbitrage 81
4 Convergence of Expectations:Bayesian Learning 84
5 The Value of Information 87
Bibliographical Note 91
Exercises 92
4 Portfolio choice 94
1 Mean–Variance Efficient Portfolios 95
1.1 Portfolio Composition and Returns 96
1.2 Diversification 98
1.3 The Efficiency Frontier in the Absence of a Riskless Security 99
1.4 Efficient Portfolios:The Case with a Risk-Free Security 101
2 Portfolio Choice under the von Neumann Morgenstern Criterion 103
3 Finance Paradigms:Quadratic and CARA Normal 105
3.1 Hedging Portfolios 107
3.2 The Demand for Risky Securities 108
Bibliographical Note 110
Exercises 110
5 Optimal risk sharing and insurance 114
1 The Optimal Allocation of Risk 115
1.1 The Model 115
1.2 Insuring Individual Idiosyncratic Risks 116
1.3 Optimality:Characterization 118
2 Decentralization 122
2.1 Complete Markets 122
2.2 State Prices,Objective Probability,and Aggregate Wealth 124
2.3 The Role of Options 124
3 Market Failures 128
Bibliographical Note 130
Exercises 131
6 Equilibrium on the stock exchange and risk sharing 135
1 The Amounts at Stake 136
2 The Stock Exchange 137
2.1 The Securities 138
2.2 Investors 138
2.3 Equilibrium 139
3 The CAPM 140
3.1 Returns 141
3.2 Equilibrium Prices 143
4 The General Equilibrium Model and Price Determination 144
4.1 Prices of Risky Securities 145
4.2 The Allocation of Risks 147
4.3 Determination of the Interest Rate 148
Bibliographical Note 150
Exercises 151
7 Trade and information 156
1 Short-Term Equilibrium 157
1.1 Investors 158
1.2 Equilibrium 159
2 Public Information and Markets 162
2.1 Ex ante Complete Markets and Public Information in an Exchange Economy 163
2.2 The Impact of Information:Production and Incomplete Markets 166
3 Private Information 170
3.1 Equilibrium with Na?ve Traders 170
3.2 Private Information and Rational Expectations 172
3.3 Revelation of Information by Prices 174
4 Information:The Normal Model 176
4.1 Rational Expectations and the Aggregation of Information 177
4.2 Noise and the Transmission of Information by Prices 180
4.3 Insiders 182
5 Formation of Expectations and Investments 185
Bibliographical Note 188
Exercises 189
8 Intertemporal valuation 194
1 The Representative Agent Model 195
1.1 The Economy 195
1.2 The Spot Curve:A Review 196
2 Risk-Free Aggregate Resources 197
2.1 The Interest Rate Curve and Its Evolution 197
2.2 The Valuation of Risky Assets 199
3 Risky Future Resources 202
3.1 The Interest Rate Curve 202
3.2 Spot and Forward Curves:An Example 205
3.3 The Dynamics of Securities Prices 207
4 Empirical Verification 210
4.1 Isoelastic Utilities 210
4.2 Beyond the Representative Agent 212
5 Fundamental Value and Bubbles 214
Bibliographical Note 216
Exercises 217
Part 3 The Firm 219
9 Corporate finance and risk 227
1 A Simple Accounting Representation 228
1.1 Financial Backers 228
1.2 The Net Cash Proceeds 230
2 Intertemporal Decisions without Uncertainty 231
2.1 The Accounting Framework 231
2.2 Value of the Firm 233
2.3 Stock Market Valuation 235
2.4 Limited Liability 238
2.5 Comments on the Leverage Effect 238
3 Financial Structure 240
3.1 Complete Markets 241
3.2 Incomplete Markets 244
3.3 Some Limitations 246
Bibliographical Note 246
Exercises 247
10 Financing investments and limited liability 249
1 The Choice Criteria for Investments 250
1.1 Complete Markets 250
1.2 Incomplete Markets 256
1.3 Multiplicative Risk 258
2 Investments,Equity Financing,and Insider Information 259
3 The Market for Credit 263
3.1 The Market without Dysfunction 263
3.2 Default Risk 265
3.3 Equilibrium 268
Bibliographical Note 273
Exercises 274
Index 279