Title :Microfoundations of Financial Economics: An Introduction to General Equilibrium Asset Pricing

IT IS A PART OF THE PRINCETON SERIES IN FINANCE

Author: Yvan Lengwiler

SERIES EDITORS

Darrell Duffie

Stanford University

Stephen Schaefer
London Business School

Princeton University Press

Princeton and Oxford

2004 by Princeton University Press

Preface xiii

1 Introduction 1

1.1 What finance theory is about 1

1.2 Some history of thought 2

1.3 The importance of the puzzles 7

1.4 Outline of the book 9

2 Contingent claim economy 10

2.1 The commodity space 10

2.2 Preferences and ordinal utility 14

2.3 Maximization 16

2.4 General equilibrium 23

2.5 The representative agent 32

Notes on the literature 35

Problems 35

3 Asset economy 37

3.1 Financial assets 37

3.2 Pricing by redundancy 41

3.3 Radner economies 46

3.4 Complete markets (and uniqueness of Arrow prices) 53

3.5 Complications arising from market incompleteness 60

Notes on the literature 65

Problems 65

4 Risky decisions 68

5 Static finance economy 102

6 Dynamic finance economy 141

7 Empirics and the puzzles 172

8 Adapting the theory 199

9 Epilog 239

Appendix A Symbols and notation 245

Appendix B Solutions to the problem sets 247

Bibliography 269

Index 285