Theory and Econometrics of Financial Asset Pricing

This book will provide a firm foundation in the understanding of financial economics applied to asset pricing. It carries the real world perspective of how the market works, including behavioral biases, and also wraps that understanding in the context of a rigorous economics framework of investors' risk preferences, underlying price dynamics, rational choice in the large, and market equilibrium other than inexplicable irrational bubbles. It concentrates on analyses of stock, credit, and option pricing. Existing highly cited finance models in pricing of these assets are covered in detail, and theory is accompanied by rigorous applications of econometrics. Econometrics contain elucidations of both the statistical theory as well as the practice of data analyses. Linear regression methods and some nonlinear methods are also covered. The contribution of this book, and at the same time, its novelty, is in employing materials in probability theory, economics optimization, econometrics, and data analyses together to provide a rigorous and sharp intellect for investment and financial decision-making. Mistakes are often made with far too often sweeping pragmatism without deeply knowing the underpinnings of how the market economics works. This book is written at a level that is both academically rigorous for university courses in investment, derivatives, risk management, as well as not too mathematically deep so that finance and banking graduate professionals can have a real journey into the frontier financial economics thinking and rigorous data analytical findings. This book "provides a firm foundation in the understanding of financial economics applied to asset pricing. Key finance models in asset pricing, including analyses of stocks, bonds, futures, and options, are discussed. Theory is accompanied by rigorous applications of econometrics. The econometrics and statistical methods provide the mathematical tools to perform estimation and testing of models and forecasting. Real market data is used to explain econometrics. Linear regression methods, time series modeling, unit roots and cointegration, estimation of stochastic processes, and some nonlinear methods including maximum likelihood and the generalized method of moments are covered. This book is written for aspiring students in the fields of investment, derivatives, and risk management. It is also useful for finance and banking professionals who wish to better understand applications of rigorous methods of estimations, inference, and forecasting" -- Back cover Preface Contents 1 Probability Distributions 2 Simple Linear Regression 3 Capital Asset Pricing Model 4 Event Studies 5 Time Series Modeling 6 Multiple Linear Regression 7 Multi-Factor Asset Pricing 8 Euler Condition for Asset Pricing 9 Maximum Likelihood Methods 10 Unit Roots and Cointegration 11 Bond Prices and Interest Rate Models 12 Option Pricing and Implied Moments List of Figures List of Tables About the Author Index