Neoclassical Finance

<body stylesrc="../_private/template_title.htm" topmargin="10" leftmargin="10" bgcolor="#FFFFFF" link="#333366" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table2"> <tr> <td width="780"> <div align="center"> <table border="0" cellpadding="5" cellspacing="0" height="206" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table3"> <tr> <td align="right" height="198" width="1%"> <p align="left"> <img border="0" src="../images/book_ross_stephen_(2004).gif" width="135" height="200"></td> <td valign="top" align="left" height="198"> <table border="0" cellspacing="1" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" id="table4"> <tr> <td colspan="3" width="0%"> <p class="book_title">Neoclassical Finance</td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"><img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> <td width="52%" class="book_details_tags" valign="top" height="144" align="left" rowspan="9"> <map name="FPMap5"> <area href="../main/ratings.htm" shape="rect" coords="73, 0, 162, 33"> </map> <img border="0" src="../images_title/ross_s84.gif" usemap="#FPMap5" width="205" height="158"></td> <td class="book_details" height="112" align="center" width="50%" rowspan="7"> <map name="FPMap4"> <area target="_top" href="../link_topic/best_of_2004.htm" shape="rect" coords="0, 0, 124, 108"> </map> <img border="0" src="../images/best_of_award_2004.gif" usemap="#FPMap4" width="125" height="109"></td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" height="32" align="center" width="50%" rowspan="2"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="468" id="table5"> <tr> <td> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </div> <table border="0" cellpadding="5" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table6"> <tr> <td width="51%" valign="top"> <p align="left" class="body_expanded"><strong style="font-weight: 400">Author Stephen Ross is perhaps best known for developing the arbitrage pricing theory (APT). He also co-discovered risk neutral valuation, which makes possible the methodology of binomial tree pricing.</strong></p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="125" align="right" id="table7"> <tr> <td width="5"> </td> <td width="120"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> <p align="left" class="body_expanded"><strong style="font-weight: 400">The first thing you will notice about this book is how light it is in your hands. At barely 100 pages, it is succinct. The book is based on the Princeton University Lectures in Finance that professor Ross gave in 2001. Its four chapters read like four related journal articles. Perhaps the most apt description of the book is the authors own:</strong></p> <p align="left" class="body" style="margin-left: 17; line-height:130%; margin-right:12; margin-top:6; margin-bottom:6"><strong style="font-weight: 400"> I hope this monograph will be interesting to those who know something about the subject, and I hope that it can also serve as an entry point to the field for those with a serious interest in finance and a background in economics. This monograph will not, however, replace a textbook introduction; it is too idiosyncratic and personal to serve that purpose. Rather, the intention is that the reader will come to appreciate both the elegance and the power of neoclassical financial theory and analysis.</strong></p> <p align="left" class="body_expanded"><strong style="font-weight: 400">Today, the challenges of pricing assets in incomplete markets—a need motivated by such market realities as stochastic volatility and credit derivatives—is reintroducing concepts such as utility functions and pricing kernels into financial engineering. For this reason, financial engineering and related branches of applied finance are somewhat returning to their roots. Because it is about those roots, this book is highly relevant.</strong></p> </td> <td width="49%" valign="top" class="body" rowspan="2"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td width="100%" bgcolor="#333366"> <p class="header_yellow" align="center">Contents</td> </tr> <tr> <td width="100%" class="explanatory_text"> <table border="1" cellpadding="0" cellspacing="5" style="border-collapse: collapse" bordercolor="#CCCCFF" bgcolor="#CCCCFF" width="100%" id="table9"> <tr> <td class="contents_expanded"> <p class="contents" style="line-height: 110%; margin-top: 3; margin-bottom: 3">1. No arbitrage: the fundamental theorem of finance</p> <p class="contents" style="line-height: 110%; margin-top: 3; margin-bottom: 3">2. Bounding the pricing kernel, asset pricing, and complete markets</p> <p class="contents" style="line-height: 110%; margin-top: 3; margin-bottom: 3">3. Efficient markets</p> <p class="contents" style="line-height: 110%; margin-top: 3; margin-bottom: 3">4. A neoclassical look at behavioral finance: the closed-end fund puzzle</td> </tr> </table> </td> </tr> </table> <p align="left" class="body"><strong style="font-weight: 400">The first chapter discusses the foundations of asset pricing theory: no arbitrage, the fundamental theorem of asset pricing, representation theory, risk neutral valuation, etc. The discussion has the brevity and clarity of a well written mathematics paper. It is not about how to price some exotic derivative with stochastic volatility models. Rather, it is about theory. If you have been struggling with some of the more recent books or articles on financial engineering in incomplete markets, you will really appreciate the explanations of basic concepts this chapter affords. </strong></p> <p align="left" class="body">The second chapter is the most technical of the book. It takes a more detailed look at the pricing kernel, using the no arbitrage argument to derive a bound on its volatility.</p> <p align="left" class="body"><strong style="font-weight: 400">What the first two chapters do more than anything else is clarify what a pricing kernel is and what its significance is. If you have been struggling with this concept, definitely grab a copy of this book.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">Chapter three takes a fresh look at market efficiency and makes the important observation that tests of efficiency are difficult (impossible?) to divorce from the asset pricing models on which they are based. Ross is hardly going to start promoting technical analysis, but this chapter will prompt some soul searching.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">The last chapter explores a neoclassical finance explanation for the discounts to net asset value at which closed-end mutual funds routinely trade. Actually, the chapter is more than that. The closed-end fund "anomaly" is one of the strongest empirical arguments in favor of the emerging field of behavioral finance. This chapter is a general refutation of behavioral finance. It also contains a nice derivation of the present value of a closed end fund's future management fees. If you would like to see financial mathematics used for something other than pricing Wall Street's latest creation, this derivation will tickle your fancy.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">Actually, I think that is why I like this book so much. Sure, it teaches you much important finance, but the real pleasure is seeing how the mathematics is used. Ross is a master. His book is a pleasure to read.</strong></p> <p align="center" class="body"> </p> </td> </tr> <tr> <td width="51%" valign="bottom"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table10"> <tr> <td width="100%"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </td> </tr> </table> <div align="left"> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" bgcolor="#FFFFCC" id="table11"> <tr> <td width="100%" align="center"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" bgcolor="#FFFFCC" id="table12"> <tr> <td> <p class="body" style="margin-bottom: 6"><b><font color="#333366" size="3">For related books, see sections:</font></b></p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/finance_general.htm">Finance - General</a></p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/financial_engineering_basic.htm">Financial Engineering - Basic Theory</a><p class="bullet"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/financial_engineering_numerical_methods.htm">Financial Engineering - Numerical Methods</a><p class="bullet"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/financial_engineering_intermediate.htm">Financial Engineering - Intermediate Theory</a><p class="bullet"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/financial_engineering_theory.htm">Financial Engineering - Advanced Theory</a><p class="bullet"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/markets_industries_derivatives.htm">Markets - Derivatives</a><p class="bullet"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/math_financial_math.htm">Mathematics - Financial Math</a></td> </tr> </table> </td> </tr> </table> </div> </td> <td>  </td> </tr> </table> </div>  <table border="0" style="border-collapse: collapse" width="100%" cellpadding="0" id="table1" bgcolor="#FFFFFF"> <tr> <td colspan="2" height="12"> <p style="margin-top: 0"> </td> </tr> <tr> <td align="right"> <p align="left" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Ads by Contingency Analysis.</font></a></td> <td align="left"> <p align="right" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Advertise on this site.</font></a></td> </tr> <tr> <td align="center" colspan="2">  <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=iframe" allowtransparency="true" background-color="transparent" style="margin: 0px; padding: 0px; border-width: 0px" width="300" height="250" frameborder="0" marginwidth="0" marginheight="0" scrolling="no"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=300x250;setID=93136"> <img src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=img" border="0" height="250" width="300" alt=""></a> </noscript><![endif]> </iframe>   </td> </tr> </table> <p align="center" style="margin-top: 20"> <map name="FPMap0_I1"> <area href="http://www.riskbook.com" shape="rect" coords="0, 0, 184, 29" target="_top"></map> <img border="0" src="../images/open_book_riskbook.gif" usemap="#FPMap0_I1" width="185" height="30"></p> <p class="a" align="center"><font face="Arial" size="2"><a href="../main/disclaimer.htm">disclaimer</a></font></p> <p class="a" align="center"><span class="verdana10">website:</span> <a target="_top" href="http://www.contingencyanalysis.com"> <font size="2" face="Arial">http://www.contingencyanalysis.com</font></a><br> <span class="verdana10">books direct link:</span> <a target="_top" href="http://www.riskbook.com"><font size="2" face="Arial">http://www.riskbook.com</font></a><br> copyright <font face="Times New Roman">©</font> Contingency Analysis, 1996 - current</p> <p class="a" align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_book_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p>  </body>