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Book
vii, 168 p. : ill ; 24 cm.
  • Acknowledgments ix PART I: PRELIMINARIES 1 Chapter 1: Why Study Information Choice? 3 1.1 Types of Learning Models 4 1.2 Themes That Run through the Book 5 1.3 Organization of the Book 8 Chapter 2: Bayesian Updating 11 2.1 Normal Random Variables 11 2.2 Uniform Random Variables 13 2.3 The Kalman Filter 13 2.4 Bayesian Updating in Continuous Time 15 2.5 Mathematical References 16 2.6 Exercises 16 Chapter 3: Measuring Information Flows 17 3.1 Preliminaries 17 3.2 Entropy and Rational Inattention 18 3.3 Additive Cost in Signal Precision 20 3.4 Diminishing Returns to Learning and Unlearnable Risk 21 3.5 Inattentiveness 22 3.6 Recognition 22 3.7 Information-Processing Frictions 23 3.8 Learning When Outcomes Are Correlated 23 3.9 What Is the Right Learning Technology? 26 3.10 Appendix: Matrix Algebra and Eigen-Decompositions 27 3.11 Exercises 27 Chapter 4: Games with Heterogeneous Information 29 4.1 Preliminary Concepts 29 4.2 Heterogeneous Information Eliminates Multiple Equilibria 30 4.3 Information and Covariance: A Beauty Contest Model 33 4.4 Strategic Motives in Information Acquisition 36 4.5 Example: Information Choice and Real Investment 39 4.6 Public Information Acquisition and Multiple Equilibria 42 4.7 Broader Themes and Related Literature 44 4.8 Exercises 45 PART II: INFORMATION CHOICE WITH COMPLEMENTARITY IN ACTIONS 47 Chapter 5: Disclosing Public Information 49 5.1 Payoff Externalities and the Social Value of Information 49 5.1.1 Coordination and Overreaction to Public Information 49 5.1.2 Morris and Shin's Social Cost of Public Information 50 5.1.3 Can Private Information Also Be Socially Costly? 51 5.1.4 A More General Approach 52 5.1.5 The Central Bank Transparency Debate 53 5.2 Public Information Crowds Out Private Information 53 5.2.1 Amador and Weill 2009 53 5.2.2 Complementary Public and Private Information 55 5.2.3 Private Information Makes Public Disclosures More Informative 57 5.3 More Information Increases Price Volatility 58 5.4 Public Information Makes Money Neutral 59 5.5 Broader Themes and Paths for Future Research 59 5.5.1 Speculative Currency Attacks 60 5.5.2 A Coordination-Based Theory of Leadership 61 5.6 Exercises 62 Chapter 6: Informational Inertia and Price-Setting 63 6.1 Lucas-Phelps Model 64 6.2 A Recipe for Inertia 67 6.3 Inattentiveness in Price-Setting 69 6.4 Rational Inattention Models of Price-Setting 72 6.5 Are Prices State Dependent or Time Dependent? 76 6.6 Broader Themes and Paths for Future Research 80 6.7 Exercises 82 PART III: INFORMATION CHOICE WITH SUBSTITUTABILITY IN ACTIONS 83 Chapter 7: Information Choice and Investment Choice 85 7.1 A One-Asset Model with Information Choice 86 7.2 Multiple Assets and Exogenous Information 91 7.3 Multiple Assets with Information Choice 94 7.3.1 Gains to Specialization 95 7.3.2 Identical Investors Hold Different Portfolios 96 7.4 Interpreting Information Constraints in Equilibrium 97 7.5 Broader Themes and Paths for Future Research 99 7.6 Appendix: Computing Expected Utility 101 7.7 Appendix: Correlated Assets 104 7.8 Exercises 105 Chapter 8: Returns to Scale in Information 107 8.1 Returns to Scale in Real Investment (One Asset) 108 8.2 Gains to Specialization (N Assets) 110 8.2.1 Result: Optimal Portfolio Choice 112 8.2.2 Result: Optimal Information Choice 113 8.2.3 Indifference Results 114 8.2.4 Preference for Early Resolution of Uncertainty 115 8.3 Markets for Information 116 8.4 Broader Themes 119 8.5 Paths for Future Research 120 8.6 Exercises 123 Chapter 9: Information as an Aggregate Shock 124 9.1 News about Future Productivity 125 9.1.1 Model 1: Cross-Industry Complementarity 125 9.1.2 Model 2: Gradual Capital Adjustment 127 9.1.3 Matching Stock Market Fluctuations 128 9.1.4 Empirical Evidence on News Shocks 129 9.2 News about Current Productivity 130 9.2.1 Model 3: Aggregate News Shocks 130 9.2.2 Model 4: Confusing Private and Public News 133 9.3 Broader Themes and Paths for Future Research 137 9.4 Exercises 138 PART IV: MEASUREMENT 141 Chapter 10: Testing Information Theories 143 10.1 Measuring Flows of News 143 10.2 Forecast Precision 144 10.3 Using Covariances to Infer Information Sets 145 10.4 Realized Profits as Proxies for Information 146 10.5 Information Choice as a Substitute for Information Data 146 10.6 The Bid-Ask Spread and PIN 149 Chapter 11: Conclusions 152 References 153 Index 165.
  • (source: Nielsen Book Data)9780691142203 20160606
Most theories in economics and finance predict what people will do, given what they know about the world around them. But what do people know about their environments? The study of information choice seeks to answer this question, explaining why economic players know what they know--and how the information they have affects collective outcomes. Instead of assuming what people do or don't know, information choice asks what people would choose to know. Then it predicts what, given that information, they would choose to do. In this textbook, Laura Veldkamp introduces graduate students in economics and finance to this important new research. The book illustrates how information choice is used to answer questions in monetary economics, portfolio choice theory, business cycle theory, international finance, asset pricing, and other areas. It shows how to build and test applied theory models with information frictions. And it covers recent work on topics such as rational inattention, information markets, and strategic games with heterogeneous information. Illustrates how information choice is used to answer questions in monetary economics, portfolio choice theory, business cycle theory, international finance, asset pricing, and other areas Teaches how to build and test applied theory models with information frictions Covers recent research on topics such as rational inattention, information markets, and strategic games with heterogeneous information.
(source: Nielsen Book Data)9780691142203 20160606
Business Library
FINANCE-621-01
Book
xvi, 487 p. : ill. ; 25 cm.
  • Preface -- I Single-Period Models -- 1 Utility Functions and Risk Aversion Coefficients -- 1.1 Uniqueness of Utility Functions -- 1.2 Concavity and Risk Aversion -- 1.3 Coefficients of Risk Aversion -- 1.4 Risk Aversion and Risk Premia -- 1.5 Constant Absolute Risk Aversion -- 1.6 Constant Relative Risk Aversion -- 1.7 Linear Risk Tolerance -- 1.8 Conditioning and Aversion to Noise -- 1.9 Notes and References -- Exercises -- 2 Portfolio Choice and Stochastic Discount Factors -- 2.1 The First-Order Condition -- 2.2 Stochastic Discount Factors -- 2.3 A Single Risky Asset -- 2.4 Linear Risk Tolerance -- 2.5 Multiple Asset CARA-Normal Example -- 2.6 Mean-Variance Preferences -- 2.7 Complete Markets -- 2.8 Beginning-of-Period Consumption -- 2.9 Time-Additive Utility -- 2.10 Notes and References -- Exercises -- 3 Equilibrium and Efficiency -- 3.1 Pareto Optima -- 3.2 Social Planner's Problem -- 3.3 Pareto Optima and Sharing Rules -- 3.4 Competitive Equilibria -- 3.5 Complete Markets -- 3.6 Linear Risk Tolerance -- 3.7 Beginning-of-Period Consumption 1 -- 3.8 Notes and References -- Exercises -- 4 Arbitrage and Stochastic Discount Factors -- 4.1 Fundamental Theorem on Existence of SDF's -- 4.2 Law of One Price and Stochastic Discount Factors -- 4.3 Risk Neutral Probabilities -- 4.4 Projecting SDF's onto the Asset Span -- 4.5 Projecting onto a Constant and the Asset Span -- 4.6 Hansen-Jagannathan Bound with a Risk-Free Asset -- 4.7 Hansen-Jagannathan Bound with No Risk-Free Asset -- 4.8 Hilbert Spaces and Gram-Schmidt Orthogonalization -- 4.9 Notes and References Exercises -- 5 Mean-Variance Analysis -- 5.1 The Calculus Approach -- 5.2 Two-Fund Spanning -- 5.3 The Mean-Standard Deviation Trade-Off -- 5.4 GMV Portfolio and Mean-Variance Efficiency -- 5.5 Calculus Approach with a Risk-Free Asset -- 5.6 Two-Fund Spanning Again -- 5.7 Orthogonal Projections and Frontier Returns -- 5.8 Risk-Free Return Proxies -- 5.9 Inefficiency of ~Rp -- 5.10 Hansen-Jagannathan Bound with a Risk-Free Asset -- 5.11 Frontier Returns and Stochastic Discount Factors -- 5.12 Separating Distributions -- 5.13 Notes and References -- Exercises -- 6 Beta Pricing Models -- 6.1 Beta Pricing -- 6.2 Single-Factor Models with Returns as Factors -- 6.3 The Capital Asset Pricing Model -- 6.4 Returns and Excess Returns as Factors -- 6.5 Projecting Factors on Returns and Excess Returns -- 6.6 Beta Pricing and Stochastic Discount Factors -- 6.7 Arbitrage Pricing Theory -- 6.8 Notes and References -- Exercises -- 7 Representative Investors -- 7.1 Pareto Optimality Implies a Representative Investor -- 7.2 Linear Risk Tolerance -- 7.3 Consumption-Based Asset Pricing -- 7.4 Pricing Options -- 7.5 Notes and References -- Exercises -- II Dynamic Models -- 8 Dynamic Securities Markets -- 8.1 The Portfolio Choice Problem -- 8.2 Stochastic Discount Factor Processes -- 8.3 Self-Financing Wealth Processes -- 8.4 The Martingale Property -- 8.5 Transversality Conditions and Ponzi Schemes -- 8.6 The Euler Equation -- 8.7 Arbitrage and the Law of One Price -- 8.8 Risk Neutral Probabilities -- 8.9 Complete Markets -- 8.10 Portfolio Choice in Complete Markets -- 8.11 Competitive Equilibria -- 8.12 Notes and References -- Exercises -- 9 Portfolio Choice by Dynamic Programming -- 9.1 Introduction to Dynamic Programming -- 9.2 Bellman Equation for Portfolio Choice -- 9.3 The Envelope Condition -- 9.4 Maximizing CRRA Utility of Terminal Wealth -- 9.5 CRRA Utility with Intermediate Consumption -- 9.6 CRRA Utility with an Infinite Horizon -- 9.7 Notes and References -- Exercises -- 10 Conditional Beta Pricing Models -- 10.1 From Conditional to Unconditional Models -- 10.2 The Conditional CAPM -- 10.3 The Consumption-Based CAPM -- 10.4 The Intertemporal CAPM -- 10.5 An Approximate CAPM -- 10.6 Notes and References -- Exercises -- 11 Some Dynamic Equilibrium Models -- 11.1 Representative Investors -- 11.2 Valuing the Market Portfolio -- 11.3 The Risk-Free Return -- 11.4 The Equity Premium Puzzle -- 11.5 The Risk-Free Rate Puzzle -- 11.6 Uninsurable Idiosyncratic Income Risk -- 11.7 External Habits -- 11.8 Notes and References -- Exercises -- 12 Brownian Motion and Stochastic Calculus -- 12.1 Brownian Motion -- 12.2 Quadratic Variation -- 12.3 Ito Integral -- 12.4 Local Martingales and Doubling Strategies -- 12.5 Ito Processes -- 12.6 Asset and Portfolio Returns -- 12.7 Martingale Representation Theorem -- 12.8 Ito's Formula: Version I -- 12.9 Geometric Brownian Motion -- 12.10 Covariations of Ito Processes -- 12.11 Ito's Formula: Version II -- 12.12 Conditional Variances and Covariances -- 12.13 Transformations of Models -- 12.14 Notes and References -- Exercises -- 13 Continuous-Time Securities Markets and SDF Processes -- 13.1 Dividend-Reinvested Asset Prices -- 13.2 Securities Markets -- 13.3 Self-Financing Wealth Processes -- 13.4 Conditional Mean-Variance Frontier -- 13.5 Stochastic Discount Factor Processes -- 13.6 Properties of SDF Processes -- 13.7 Sufficient Conditions for MW to be a Martingale -- 13.8 Valuing Consumption Streams -- 13.9 Risk Neutral Probabilities -- 13.10 Complete Markets -- 13.11 SDF Processes without a Risk-Free Asset -- 13.12 Inflation and Foreign Exchange -- 13.13 Notes and References -- Exercises -- 14 Continuous-Time Portfolio Choice and Beta Pricing -- 14.1 The Static Budget Constraint -- 14.2 Complete Markets -- 12 CONTENTS -- 14.3 Constant Capital Market Line -- 14.4 Dynamic Programming Example -- 14.5 General Markovian Portfolio Choice -- 14.6 The CCAPM -- 14.7 The ICAPM -- 14.8 The CAPM -- 14.9 Infinite-Horizon Dynamic Programming -- 14.10 Dynamic Programming with CRRA Utility -- 14.11 Verification Theorem -- 14.12 Notes and References -- Exercises -- III Derivative Securities -- 15 Option Pricing -- 15.1 Introduction to Options -- 15.2 Put-Call Parity and Option Bounds -- 15.3 SDF Processes -- 15.4 Changes of Measure -- 15.5 Market Completeness -- 15.6 The Black-Scholes Formula -- 15.7 Delta Hedging -- 15.8 The Fundamental PDE -- 15.9 American Options -- 15.10 Smooth Pasting -- 15.11 European Options on Dividend-Paying Assets -- 15.12 Notes and References -- Exercises -- 16 Forwards, Futures, and More Option Pricing -- 16.1 Forward Measures -- 16.2 Forward Contracts -- 16.3 Futures Contracts -- 16.4 Exchange Options -- 16.5 Options on Forwards and Futures -- 16.6 Dividends and Random Interest Rates -- 16.7 Implied Volatilities and Local Volatilities -- 16.8 Stochastic Volatility -- 16.9 Notes and References -- 17 Term Structure Models -- 17.1 Vasicek Model -- 17.2 Cox-Ingersoll-Ross Model -- 17.3 Multi-Factor CIR Models -- 17.4 Affine Models -- 1 -- 17.6 Quadratic Models -- 17.7 Forward Rates -- 17.8 Fitting the Yield Curve -- 17.9 Heath-Jarrow-Morton Models -- 17.10 Notes and References -- Exercises -- IV Topics -- 18 Heterogeneous Priors -- 18.1 State-Dependent Utility Formulation -- 18.2 Representative Investors in Complete Single-Period Markets -- 18.3 Representative Investors in Complete Dynamic Markets -- 18.4 Short Sales Constraints and Biased Prices -- 18.5 Speculative Trade -- 18.6 Notes and References -- Exercises -- 19 Asymmetric Information -- 19.1 The No-Trade Theorem -- 19.2 Normal-Normal Updating -- 19.3 A Fully Revealing Equilibrium -- 19.5 A Model with a Large Number of Investors -- 19.7 The Kyle Model in Continuous Time -- 19.8 Notes and References -- Exercises -- 20 Alternative Preferences in Single-Period Models -- 20.1 The Ellsberg Paradox -- 20.2 The Sure Thing Principle -- 20.3 Multiple Priors and Max-Min Utility -- 20.4 Non-Additive Set Functions -- 20.5 The Allais Paradox -- 20.6 The Independence Axiom -- 20.7 Betweenness Preferences -- 20.8 Rank-Dependent Preferences -- 20.9 First-Order Risk Aversion -- 20.10 Framing and Loss Aversion -- 20.11 Prospect Theory -- 20.12 Notes and References -- Exercises -- 21 Alternative Preferences in Dynamic Models -- 21.1 Recursive Preferences -- 21.2 Portfolio Choice with Epstein-Zin-Weil Utility -- 21.3 A Representative Investor with Epstein-Zin-Weil Utility -- 21.4 Internal Habits -- 21.5 Linear Internal Habits in Complete Markets -- 21.6 A Representative Investor with an Internal Habit -- 21.7 Keeping/Catching Up with the Joneses -- 21.8 Ambiguity Aversion in Dynamic Models -- 21.9 Notes and References -- Exercises -- 22 Production Models -- 22.1 Discrete-Time Model -- 22.2 Marginal q -- 22.3 Costly Reversibility -- 22.4 Project Risk and Firm Risk -- 22.5 Irreversibility and Options -- 22.6 Irreversibility and Perfect Competition -- 22.7 Irreversibility and Risk -- 22.8 Irreversibility and Perfect Competition: An Example -- 22.9 Notes and References -- Exercises -- Appendices -- A Some Probability and Stochastic Process Theory -- A.1 Random Variables -- A.2 Probabilities -- A.3 Distribution Functions and Densities -- A.4 Expectations -- A.5 Convergence of Expectations -- A.6 Interchange of Differentiation and Expectation -- A.7 Random Vectors -- A.8 Conditioning -- A.9 Independence -- A.10 Equivalent Probability Measures -- A.11 Filtrations, Martingales, and Stopping Times -- A.12 Martingales under Equivalent Measures -- A.13 Local Martingales -- A.14 The Usual Conditions -- Notes -- References -- Index.
  • (source: Nielsen Book Data)9780195380613 20160619
This book is intended as a textbook for Ph.D. students in finance and as a reference book for academics. It is written at an introductory level but includes detailed proofs and calculations as section appendices. It covers the classical results on single-period, discrete-time, and continuous-time models. It also treats various proposed explanations for the equity premium and risk-free rate puzzles: persistent heterogeneous idiosyncratic risks, internal habits, external habits, and recursive utility. Most of the book assumes rational behavior, but two topics important for behavioral finance are covered: heterogeneous beliefs and non-expected-utility preferences. There are also chapters on asymmetric information and production models. The book includes numerous exercises designed to provide practice with the concepts and also to introduce additional results. Each chapter concludes with a notes and references section that supplies references to additional developments in the field.
(source: Nielsen Book Data)9780195380613 20160619
Business Library
FINANCE-621-01
Book
1 online resource (504 pages) : illustrations.
  • Preface -- I Single-Period Models -- 1 Utility Functions and Risk Aversion Coefficients -- 1.1 Uniqueness of Utility Functions -- 1.2 Concavity and Risk Aversion -- 1.3 Coefficients of Risk Aversion -- 1.4 Risk Aversion and Risk Premia -- 1.5 Constant Absolute Risk Aversion -- 1.6 Constant Relative Risk Aversion -- 1.7 Linear Risk Tolerance -- 1.8 Conditioning and Aversion to Noise -- 1.9 Notes and References -- Exercises -- 2 Portfolio Choice and Stochastic Discount Factors -- 2.1 The First-Order Condition -- 2.2 Stochastic Discount Factors -- 2.3 A Single Risky Asset -- 2.4 Linear Risk Tolerance -- 2.5 Multiple Asset CARA-Normal Example -- 2.6 Mean-Variance Preferences -- 2.7 Complete Markets -- 2.8 Beginning-of-Period Consumption -- 2.9 Time-Additive Utility -- 2.10 Notes and References -- Exercises -- 3 Equilibrium and Efficiency -- 3.1 Pareto Optima -- 3.2 Social Planner's Problem -- 3.3 Pareto Optima and Sharing Rules -- 3.4 Competitive Equilibria -- 3.5 Complete Markets -- 3.6 Linear Risk Tolerance -- 3.7 Beginning-of-Period Consumption 1 -- 3.8 Notes and References -- Exercises -- 4 Arbitrage and Stochastic Discount Factors -- 4.1 Fundamental Theorem on Existence of SDF's -- 4.2 Law of One Price and Stochastic Discount Factors -- 4.3 Risk Neutral Probabilities -- 4.4 Projecting SDF's onto the Asset Span -- 4.5 Projecting onto a Constant and the Asset Span -- 4.6 Hansen-Jagannathan Bound with a Risk-Free Asset -- 4.7 Hansen-Jagannathan Bound with No Risk-Free Asset -- 4.8 Hilbert Spaces and Gram-Schmidt Orthogonalization -- 4.9 Notes and References Exercises -- 5 Mean-Variance Analysis -- 5.1 The Calculus Approach -- 5.2 Two-Fund Spanning -- 5.3 The Mean-Standard Deviation Trade-Off -- 5.4 GMV Portfolio and Mean-Variance Efficiency -- 5.5 Calculus Approach with a Risk-Free Asset -- 5.6 Two-Fund Spanning Again -- 5.7 Orthogonal Projections and Frontier Returns -- 5.8 Risk-Free Return Proxies -- 5.9 Inefficiency of ~Rp -- 5.10 Hansen-Jagannathan Bound with a Risk-Free Asset -- 5.11 Frontier Returns and Stochastic Discount Factors -- 5.12 Separating Distributions -- 5.13 Notes and References -- Exercises -- 6 Beta Pricing Models -- 6.1 Beta Pricing -- 6.2 Single-Factor Models with Returns as Factors -- 6.3 The Capital Asset Pricing Model -- 6.4 Returns and Excess Returns as Factors -- 6.5 Projecting Factors on Returns and Excess Returns -- 6.6 Beta Pricing and Stochastic Discount Factors -- 6.7 Arbitrage Pricing Theory -- 6.8 Notes and References -- Exercises -- 7 Representative Investors -- 7.1 Pareto Optimality Implies a Representative Investor -- 7.2 Linear Risk Tolerance -- 7.3 Consumption-Based Asset Pricing -- 7.4 Pricing Options -- 7.5 Notes and References -- Exercises -- II Dynamic Models -- 8 Dynamic Securities Markets -- 8.1 The Portfolio Choice Problem -- 8.2 Stochastic Discount Factor Processes -- 8.3 Self-Financing Wealth Processes -- 8.4 The Martingale Property -- 8.5 Transversality Conditions and Ponzi Schemes -- 8.6 The Euler Equation -- 8.7 Arbitrage and the Law of One Price -- 8.8 Risk Neutral Probabilities -- 8.9 Complete Markets -- 8.10 Portfolio Choice in Complete Markets -- 8.11 Competitive Equilibria -- 8.12 Notes and References -- Exercises -- 9 Portfolio Choice by Dynamic Programming -- 9.1 Introduction to Dynamic Programming -- 9.2 Bellman Equation for Portfolio Choice -- 9.3 The Envelope Condition -- 9.4 Maximizing CRRA Utility of Terminal Wealth -- 9.5 CRRA Utility with Intermediate Consumption -- 9.6 CRRA Utility with an Infinite Horizon -- 9.7 Notes and References -- Exercises -- 10 Conditional Beta Pricing Models -- 10.1 From Conditional to Unconditional Models -- 10.2 The Conditional CAPM -- 10.3 The Consumption-Based CAPM -- 10.4 The Intertemporal CAPM -- 10.5 An Approximate CAPM -- 10.6 Notes and References -- Exercises -- 11 Some Dynamic Equilibrium Models -- 11.1 Representative Investors -- 11.2 Valuing the Market Portfolio -- 11.3 The Risk-Free Return -- 11.4 The Equity Premium Puzzle -- 11.5 The Risk-Free Rate Puzzle -- 11.6 Uninsurable Idiosyncratic Income Risk -- 11.7 External Habits -- 11.8 Notes and References -- Exercises -- 12 Brownian Motion and Stochastic Calculus -- 12.1 Brownian Motion -- 12.2 Quadratic Variation -- 12.3 Ito Integral -- 12.4 Local Martingales and Doubling Strategies -- 12.5 Ito Processes -- 12.6 Asset and Portfolio Returns -- 12.7 Martingale Representation Theorem -- 12.8 Ito's Formula: Version I -- 12.9 Geometric Brownian Motion -- 12.10 Covariations of Ito Processes -- 12.11 Ito's Formula: Version II -- 12.12 Conditional Variances and Covariances -- 12.13 Transformations of Models -- 12.14 Notes and References -- Exercises -- 13 Continuous-Time Securities Markets and SDF Processes -- 13.1 Dividend-Reinvested Asset Prices -- 13.2 Securities Markets -- 13.3 Self-Financing Wealth Processes -- 13.4 Conditional Mean-Variance Frontier -- 13.5 Stochastic Discount Factor Processes -- 13.6 Properties of SDF Processes -- 13.7 Sufficient Conditions for MW to be a Martingale -- 13.8 Valuing Consumption Streams -- 13.9 Risk Neutral Probabilities -- 13.10 Complete Markets -- 13.11 SDF Processes without a Risk-Free Asset -- 13.12 Inflation and Foreign Exchange -- 13.13 Notes and References -- Exercises -- 14 Continuous-Time Portfolio Choice and Beta Pricing -- 14.1 The Static Budget Constraint -- 14.2 Complete Markets -- 12 CONTENTS -- 14.3 Constant Capital Market Line -- 14.4 Dynamic Programming Example -- 14.5 General Markovian Portfolio Choice -- 14.6 The CCAPM -- 14.7 The ICAPM -- 14.8 The CAPM -- 14.9 Infinite-Horizon Dynamic Programming -- 14.10 Dynamic Programming with CRRA Utility -- 14.11 Verification Theorem -- 14.12 Notes and References -- Exercises -- III Derivative Securities -- 15 Option Pricing -- 15.1 Introduction to Options -- 15.2 Put-Call Parity and Option Bounds -- 15.3 SDF Processes -- 15.4 Changes of Measure -- 15.5 Market Completeness -- 15.6 The Black-Scholes Formula -- 15.7 Delta Hedging -- 15.8 The Fundamental PDE -- 15.9 American Options -- 15.10 Smooth Pasting -- 15.11 European Options on Dividend-Paying Assets -- 15.12 Notes and References -- Exercises -- 16 Forwards, Futures, and More Option Pricing -- 16.1 Forward Measures -- 16.2 Forward Contracts -- 16.3 Futures Contracts -- 16.4 Exchange Options -- 16.5 Options on Forwards and Futures -- 16.6 Dividends and Random Interest Rates -- 16.7 Implied Volatilities and Local Volatilities -- 16.8 Stochastic Volatility -- 16.9 Notes and References -- 17 Term Structure Models -- 17.1 Vasicek Model -- 17.2 Cox-Ingersoll-Ross Model -- 17.3 Multi-Factor CIR Models -- 17.4 Affine Models -- 1 -- 17.6 Quadratic Models -- 17.7 Forward Rates -- 17.8 Fitting the Yield Curve -- 17.9 Heath-Jarrow-Morton Models -- 17.10 Notes and References -- Exercises -- IV Topics -- 18 Heterogeneous Priors -- 18.1 State-Dependent Utility Formulation -- 18.2 Representative Investors in Complete Single-Period Markets -- 18.3 Representative Investors in Complete Dynamic Markets -- 18.4 Short Sales Constraints and Biased Prices -- 18.5 Speculative Trade -- 18.6 Notes and References -- Exercises -- 19 Asymmetric Information -- 19.1 The No-Trade Theorem -- 19.2 Normal-Normal Updating -- 19.3 A Fully Revealing Equilibrium -- 19.5 A Model with a Large Number of Investors -- 19.7 The Kyle Model in Continuous Time -- 19.8 Notes and References -- Exercises -- 20 Alternative Preferences in Single-Period Models -- 20.1 The Ellsberg Paradox -- 20.2 The Sure Thing Principle -- 20.3 Multiple Priors and Max-Min Utility -- 20.4 Non-Additive Set Functions -- 20.5 The Allais Paradox -- 20.6 The Independence Axiom -- 20.7 Betweenness Preferences -- 20.8 Rank-Dependent Preferences -- 20.9 First-Order Risk Aversion -- 20.10 Framing and Loss Aversion -- 20.11 Prospect Theory -- 20.12 Notes and References -- Exercises -- 21 Alternative Preferences in Dynamic Models -- 21.1 Recursive Preferences -- 21.2 Portfolio Choice with Epstein-Zin-Weil Utility -- 21.3 A Representative Investor with Epstein-Zin-Weil Utility -- 21.4 Internal Habits -- 21.5 Linear Internal Habits in Complete Markets -- 21.6 A Representative Investor with an Internal Habit -- 21.7 Keeping/Catching Up with the Joneses -- 21.8 Ambiguity Aversion in Dynamic Models -- 21.9 Notes and References -- Exercises -- 22 Production Models -- 22.1 Discrete-Time Model -- 22.2 Marginal q -- 22.3 Costly Reversibility -- 22.4 Project Risk and Firm Risk -- 22.5 Irreversibility and Options -- 22.6 Irreversibility and Perfect Competition -- 22.7 Irreversibility and Risk -- 22.8 Irreversibility and Perfect Competition: An Example -- 22.9 Notes and References -- Exercises -- Appendices -- A Some Probability and Stochastic Process Theory -- A.1 Random Variables -- A.2 Probabilities -- A.3 Distribution Functions and Densities -- A.4 Expectations -- A.5 Convergence of Expectations -- A.6 Interchange of Differentiation and Expectation -- A.7 Random Vectors -- A.8 Conditioning -- A.9 Independence -- A.10 Equivalent Probability Measures -- A.11 Filtrations, Martingales, and Stopping Times -- A.12 Martingales under Equivalent Measures -- A.13 Local Martingales -- A.14 The Usual Conditions -- Notes -- References -- Index.
  • (source: Nielsen Book Data)9780195380613 20160619
This book is intended as a textbook for Ph.D. students in finance and as a reference book for academics. It is written at an introductory level but includes detailed proofs and calculations as section appendices. It covers the classical results on single-period, discrete-time, and continuous-time models. It also treats various proposed explanations for the equity premium and risk-free rate puzzles: persistent heterogeneous idiosyncratic risks, internal habits, external habits, and recursive utility. Most of the book assumes rational behavior, but two topics important for behavioral finance are covered: heterogeneous beliefs and non-expected-utility preferences. There are also chapters on asymmetric information and production models. The book includes numerous exercises designed to provide practice with the concepts and also to introduce additional results. Each chapter concludes with a notes and references section that supplies references to additional developments in the field.
(source: Nielsen Book Data)9780195380613 20160619
Stanford Libraries
FINANCE-621-01
Book
ix, 198 p. : ill. ; 25 cm
  • List of figures-- List of tables-- Preface-- Introduction-- 1. Institutions and market structure-- 2. Financial market equilibrium-- 3. Batch markets with strategic informed traders-- 4. Dealer markets: information-based models-- 5. Inventory models-- 6. Empirical models of market microstructure-- 7. Liquidity and asset pricing-- 8. Models of the limit order book-- 9. Price discovery-- 10. Policy issues in financial market structure-- Index.
  • (source: Nielsen Book Data)9780521867849 20160612
The analysis of the microstructure of financial markets has been one of the most important areas of research in finance and has allowed scholars and practitioners alike to have a much more sophisticated understanding of the dynamics of price formation in financial markets. Frank de Jong and Barbara Rindi provide an integrated graduate level textbook treatment of the theory and empirics of the subject, starting with a detailed description of the trading systems on stock exchanges and other markets and then turning to economic theory and asset pricing models. Special attention is paid to models explaining transaction costs, with a treatment of the measurement of these costs and the implications for the return on investment. The final chapters review recent developments in the academic literature. End-of-chapter exercises and downloadable data from the book's companion website provide opportunities to revise and apply models developed in the text.
(source: Nielsen Book Data)9780521867849 20160612
Business Library
FINANCE-621-01
Book
xii, 406 p. : ill.
  • Preface xi Introduction and Lecture Guide 1 References 12 Chapter 1: Aggregation of Information in Simple Market Mechanisms: Large Markets 15 1.1 Introduction and Overview 15 1.2 Large Cournot Markets 17 1.3 Welfare in Large Cournot Markets with Asymmetric Information 27 1.4 Information Aggregation in Smooth Large Markets 29 1.5 Auctions and Voting 38 1.6 Endogenous Information Acquisition 40 1.7 Summary 45 1.8 Appendix 46 1.9 Exercises 48 References 51 Chapter 2: Aggregation of Information in Simple Market Mechanisms: How Large Is Large? 53 2.1 A General Linear-Normal Cournot Model 54 2.2 Convergence to Price Taking in a Cournot Market 57 2.3 Endogenous Information Acquisition 58 2.4 Convergence to the First-Best: Market Power and Information Aggregation 62 2.5 Convergence in Auctions 67 2.6 Summary 70 2.7 Appendix 71 2.8 Exercises 74 References 76 Chapter 3: Rational Expectations and Supply Function Competition 78 3.1 Rational Expectations Equilibrium: Concepts, Problems, and Welfare 78 3.2 Supply Function Competition and REE in a Continuum Economy 84 3.3 Welfare Analysis of REE 95 3.4 Strategic Supply Function Equilibria and Convergence to a Price-Taking Equilibrium 98 3.5 Double Auctions 100 3.6 Summary 102 3.7 Appendix 102 3.8 Exercises 103 References 105 Chapter 4: Rational Expectations and Market Microstructure in Financial Markets 107 4.1 Market Microstructure 108 4.2 Competitive Rational Expectations Equilibria 112 4.3 Informed Traders Move First and Face Risk-Neutral Competitive Market Makers 130 4.4 Hedgers and Producers in a Futures Market 135 4.5 Summary 145 4.6 Appendix 147 4.7 Exercises 148 References 152 Chapter 5: Strategic Traders in Financial Markets 156 5.1 Competition in Demand Schedules 157 5.2 Informed Traders Move First 168 5.3 Market Makers Move First 177 5.4 An Application: Welfare Analysis of Insider Trading 183 5.5 Summary 189 5.6 Exercises 190 References 195 Chapter 6: Learning from Others and Herding 199 6.1 Herding, Informational Cascades, and Social Learning 200 6.2 Extensions of the Herding Model 204 6.3 A Smooth and Noisy Model of Learning from Others 210 6.4 Applications and Examples 222 6.5 The Information Externality and Welfare 227 6.6 Rational Expectations, Herding, and Information Externalities 236 6.7 Summary 239 6.8 Appendix 240 6.9 Exercises 241 References 244 Chapter 7: Dynamic Information Aggregation 248 7.1 Rational Expectations, Full-Information Equilibria, and Learning 248 7.2 Learning and Convergence to a Full-Information Equilibrium with Uninformed Firms 253 7.3 Market Dynamics with Asymmetric Information 257 7.4 Slow Learning and Convergence 261 7.5 Summary 266 7.6 Appendix 267 7.7 Exercises 271 References 273 Chapter 8: Dynamic Rational Expectations Models in Competitive Financial Markets 276 8.1 Dynamic Competitive Rational Expectations 277 8.2 The Impact of Risk-Averse Market Makers 285 8.3 Dynamic Trading with Short-Term Investors 294 8.4 Explaining Crises and Market Crashes 306 8.5 Summary 318 8.6 Appendix 320 8.7 Exercises 324 References 326 Chapter 9: Price and Information Dynamics in Financial Markets 330 9.1 Sequential Trading, Dynamic Market-Order Markets, and the Speed of Learning from Past Prices 331 9.2 Strategic Trading with Long-Lived Information 339 9.3 Market Manipulation and Price Discovery 347 9.4 Strategic Trading with Short-Lived Information 355 9.5 Strategic Hedging 358 9.6 Summary 360 9.7 Appendix 361 9.8 Exercises 362 References 365 Chapter 10: Technical Appendix 369 10.1 Information Structures and Bayesian Inference 369 10.2 Normal Distributions and Affine Information Structure 375 10.3 Convergence Concepts and Results 383 10.4 Games and Bayesian Equilibrium 390 References 398 Index 401.
  • (source: Nielsen Book Data)9780691127439 20160528
The ways financial analysts, traders, and other specialists use information and learn from each other are of fundamental importance to understanding how markets work and prices are set. This graduate-level textbook analyzes how markets aggregate information and examines the impacts of specific market arrangements - or microstructure - on the aggregation process and overall performance of financial markets. Xavier Vives bridges the gap between the two primary views of markets - informational efficiency and herding - and uses a coherent game-theoretic framework to bring together the latest results from the rational expectations and herding literatures.Vives emphasizes the consequences of market interaction and social learning for informational and economic efficiency. He looks closely at information aggregation mechanisms, progressing from simple to complex environments: from static to dynamic models; from competitive to strategic agents; and from simple market strategies such as noncontingent orders or quantities to complex ones like price contingent orders or demand schedules.Vives finds that contending theories like informational efficiency and herding build on the same principles of Bayesian decision making and that "irrational" agents are not needed to explain herding behavior, booms, and crashes. As this book shows, the microstructure of a market is the crucial factor in the informational efficiency of prices. It provides the most complete analysis of the ways markets aggregate information. It bridges the gap between the rational expectations and herding literatures. It includes exercises with solutions. It serves both as a graduate textbook and a resource for researchers, including financial analysts.
(source: Nielsen Book Data)9780691127439 20160528
Stanford Libraries
FINANCE-621-01
Book
xii, 406 pages : illustrations ; 25 cm
  • Preface xi Introduction and Lecture Guide 1 References 12 Chapter 1: Aggregation of Information in Simple Market Mechanisms: Large Markets 15 1.1 Introduction and Overview 15 1.2 Large Cournot Markets 17 1.3 Welfare in Large Cournot Markets with Asymmetric Information 27 1.4 Information Aggregation in Smooth Large Markets 29 1.5 Auctions and Voting 38 1.6 Endogenous Information Acquisition 40 1.7 Summary 45 1.8 Appendix 46 1.9 Exercises 48 References 51 Chapter 2: Aggregation of Information in Simple Market Mechanisms: How Large Is Large? 53 2.1 A General Linear-Normal Cournot Model 54 2.2 Convergence to Price Taking in a Cournot Market 57 2.3 Endogenous Information Acquisition 58 2.4 Convergence to the First-Best: Market Power and Information Aggregation 62 2.5 Convergence in Auctions 67 2.6 Summary 70 2.7 Appendix 71 2.8 Exercises 74 References 76 Chapter 3: Rational Expectations and Supply Function Competition 78 3.1 Rational Expectations Equilibrium: Concepts, Problems, and Welfare 78 3.2 Supply Function Competition and REE in a Continuum Economy 84 3.3 Welfare Analysis of REE 95 3.4 Strategic Supply Function Equilibria and Convergence to a Price-Taking Equilibrium 98 3.5 Double Auctions 100 3.6 Summary 102 3.7 Appendix 102 3.8 Exercises 103 References 105 Chapter 4: Rational Expectations and Market Microstructure in Financial Markets 107 4.1 Market Microstructure 108 4.2 Competitive Rational Expectations Equilibria 112 4.3 Informed Traders Move First and Face Risk-Neutral Competitive Market Makers 130 4.4 Hedgers and Producers in a Futures Market 135 4.5 Summary 145 4.6 Appendix 147 4.7 Exercises 148 References 152 Chapter 5: Strategic Traders in Financial Markets 156 5.1 Competition in Demand Schedules 157 5.2 Informed Traders Move First 168 5.3 Market Makers Move First 177 5.4 An Application: Welfare Analysis of Insider Trading 183 5.5 Summary 189 5.6 Exercises 190 References 195 Chapter 6: Learning from Others and Herding 199 6.1 Herding, Informational Cascades, and Social Learning 200 6.2 Extensions of the Herding Model 204 6.3 A Smooth and Noisy Model of Learning from Others 210 6.4 Applications and Examples 222 6.5 The Information Externality and Welfare 227 6.6 Rational Expectations, Herding, and Information Externalities 236 6.7 Summary 239 6.8 Appendix 240 6.9 Exercises 241 References 244 Chapter 7: Dynamic Information Aggregation 248 7.1 Rational Expectations, Full-Information Equilibria, and Learning 248 7.2 Learning and Convergence to a Full-Information Equilibrium with Uninformed Firms 253 7.3 Market Dynamics with Asymmetric Information 257 7.4 Slow Learning and Convergence 261 7.5 Summary 266 7.6 Appendix 267 7.7 Exercises 271 References 273 Chapter 8: Dynamic Rational Expectations Models in Competitive Financial Markets 276 8.1 Dynamic Competitive Rational Expectations 277 8.2 The Impact of Risk-Averse Market Makers 285 8.3 Dynamic Trading with Short-Term Investors 294 8.4 Explaining Crises and Market Crashes 306 8.5 Summary 318 8.6 Appendix 320 8.7 Exercises 324 References 326 Chapter 9: Price and Information Dynamics in Financial Markets 330 9.1 Sequential Trading, Dynamic Market-Order Markets, and the Speed of Learning from Past Prices 331 9.2 Strategic Trading with Long-Lived Information 339 9.3 Market Manipulation and Price Discovery 347 9.4 Strategic Trading with Short-Lived Information 355 9.5 Strategic Hedging 358 9.6 Summary 360 9.7 Appendix 361 9.8 Exercises 362 References 365 Chapter 10: Technical Appendix 369 10.1 Information Structures and Bayesian Inference 369 10.2 Normal Distributions and Affine Information Structure 375 10.3 Convergence Concepts and Results 383 10.4 Games and Bayesian Equilibrium 390 References 398 Index 401.
  • (source: Nielsen Book Data)9780691127439 20171218
The ways financial analysts, traders, and other specialists use information and learn from each other are of fundamental importance to understanding how markets work and prices are set. This graduate-level textbook analyzes how markets aggregate information and examines the impacts of specific market arrangements - or microstructure - on the aggregation process and overall performance of financial markets. Xavier Vives bridges the gap between the two primary views of markets - informational efficiency and herding - and uses a coherent game-theoretic framework to bring together the latest results from the rational expectations and herding literatures.Vives emphasizes the consequences of market interaction and social learning for informational and economic efficiency. He looks closely at information aggregation mechanisms, progressing from simple to complex environments: from static to dynamic models; from competitive to strategic agents; and from simple market strategies such as noncontingent orders or quantities to complex ones like price contingent orders or demand schedules.Vives finds that contending theories like informational efficiency and herding build on the same principles of Bayesian decision making and that "irrational" agents are not needed to explain herding behavior, booms, and crashes. As this book shows, the microstructure of a market is the crucial factor in the informational efficiency of prices. It provides the most complete analysis of the ways markets aggregate information. It bridges the gap between the rational expectations and herding literatures. It includes exercises with solutions. It serves both as a graduate textbook and a resource for researchers, including financial analysts.
(source: Nielsen Book Data)9780691127439 20171218
Business Library
FINANCE-621-01
Book
ix, 198 p. : ill. ; 24 cm.
The book discusses the mechanisms by which securities are traded, as well as examining economic models of asymmetric information, inventory control, and cost-minimizing trading strategies.
(source: Nielsen Book Data)9780195301649 20171227
Green Library, Stanford Libraries
FINANCE-621-01
Book
ix, 198 pages : illustrations ; 25 cm
  • Introduction
  • Trading mechanisms
  • The roll model of trade prices
  • Univariate time-series analysis
  • Sequential trade models
  • Order flow and the probability of informed trading
  • Strategic trade models
  • A generalized roll model
  • Multivariate linear microstructure models
  • Multiple securities and multiple prices
  • Dealers and their inventories
  • Limit order markets
  • Depth
  • Trading costs : retrospective and comparative
  • Prospective trading costs and execution strategies.
  • Introduction
  • Trading mechanisms
  • The roll model of trade prices
  • Univariate time series analysis
  • Sequential trade models
  • Order flow and the probability of informed trading (PIN)
  • Strategic trade models
  • A generalized roll model of trade prices
  • Multivariate linear microstructure models
  • Multiple securities and multiple prices
  • Dealers and their inventories
  • Limit order markets
  • Depth
  • Trading costs : retrospective and comparative
  • Prospective trading costs and execution strategies.
The book discusses the mechanisms by which securities are traded, as well as examining economic models of asymmetric information, inventory control, and cost-minimizing trading strategies.
(source: Nielsen Book Data)9780195301649 20171227
Business Library
FINANCE-621-01
Book
xv, 244 p. : ill. ; 24 cm.
  • 1. Information, Equilibrium, Efficiency Concepts -- 2. No-Trade Theorems, Asset Pricing, Bubbles -- 3. Market Microstructure Models -- 4. Dynamic Models, Technical Analysis and Volume -- 5. Herding and Informational Cascades -- 6. Crashes, Investigative Herding, Bank Runs.
  • (source: Nielsen Book Data)9780198296980 20160605
Asset prices are driven by public news and information that is often dispersed among many market participants. These agents try to infer each other's information by analyzing price processes. In the past two decades, theoretical research in financial economics has significantly advanced our understanding of the informational aspects of price processes. This book provides a detailed and up-to-date survey of this important body of literature. The book begins by demonstrating how to model asymmetric information and higher-order knowledge. It then contrasts competitive and strategic equilibrium concepts under asymmetric information. It also illustrates the dependence of information efficiency and allocative efficiency on the security structure and the linkage between both efficiency concepts. No-Trade theorems and market breakdowns due to asymmetric information are then explained, and the existence of bubbles under symmetric and asymmetric information is investigated. The remainder of the survey is devoted to contrasting different market microstructure models that demonstrate how asymmetric information affects asset prices and traders' information , which provide a theoretical explanation for technical analysis and illustrate why some investors "chase the trend." The reader is then introduced to herding models and informational cascades, which can arise in a setting where agents' decision-making is sequential. The insights derived from herding models are used to provide rational explanations for stock market crashes. Models in which all traders are induced to search for the same piece of information are then presented to provide a deeper insight into Keynes' comparison of the stock market with a beauty contest. The book concludes with a brief summary of bank runs and their connection to financial crises.
(source: Nielsen Book Data)9780198296980 20160605
Green Library, Stanford Libraries
FINANCE-621-01
Book
xv, 244 p. : ill. ; 24 cm.
  • 1. Information, Equilibrium, Efficiency Concepts -- 2. No-Trade Theorems, Asset Pricing, Bubbles -- 3. Market Microstructure Models -- 4. Dynamic Models, Technical Analysis and Volume -- 5. Herding and Informational Cascades -- 6. Crashes, Investigative Herding, Bank Runs.
  • (source: Nielsen Book Data)9780198296980 20160605
Asset prices are driven by public news and information that is often dispersed among many market participants. These agents try to infer each other's information by analyzing price processes. In the past two decades, theoretical research in financial economics has significantly advanced our understanding of the informational aspects of price processes. This book provides a detailed and up-to-date survey of this important body of literature. The book begins by demonstrating how to model asymmetric information and higher-order knowledge. It then contrasts competitive and strategic equilibrium concepts under asymmetric information. It also illustrates the dependence of information efficiency and allocative efficiency on the security structure and the linkage between both efficiency concepts. No-Trade theorems and market breakdowns due to asymmetric information are then explained, and the existence of bubbles under symmetric and asymmetric information is investigated. The remainder of the survey is devoted to contrasting different market microstructure models that demonstrate how asymmetric information affects asset prices and traders' information , which provide a theoretical explanation for technical analysis and illustrate why some investors "chase the trend." The reader is then introduced to herding models and informational cascades, which can arise in a setting where agents' decision-making is sequential. The insights derived from herding models are used to provide rational explanations for stock market crashes. Models in which all traders are induced to search for the same piece of information are then presented to provide a deeper insight into Keynes' comparison of the stock market with a beauty contest. The book concludes with a brief summary of bank runs and their connection to financial crises.
(source: Nielsen Book Data)9780198296980 20160605
Business Library
FINANCE-621-01
Book
x, 290 p. : ill ; 25 cm.
  • Foreword. 1. Markets and Market--Making. 2. Inventory Models. 3. Information--Based Models. 4. Strategic Trader Models I: Informed Traders. 5. Strategic Trader Models II: Uninformed Traders. 6. Information and the Price Process. 7. Market Viability and Stability. 8. Liquidity and the Relationships between Markets. 9. Issues in Market Performance.
  • (source: Nielsen Book Data)9781557864437 20160605
Written by one of the leading authorities in market microstructure research, this book provides a comprehensive guide to the theoretical work in this important area of finance.
(source: Nielsen Book Data)9781557864437 20160605
Business Library
FINANCE-621-01