Neoclassical Finance provides a concise and powerful account of the underlying principles of modern finance, drawing on a generation of theoretical and empirical advances in the field. Stephen Ross developed the no arbitrage principle, tying asset pricing to the simple proposition that there are no free lunches in financial markets, and jointly with John Cox he developed the related concept of risk-neutral pricing. In this book Ross makes a strong case that these concepts are the fundamental pillars of modern finance and, in particular, of market efficiency. In an efficient market prices reflect the information possessed by the market and, as a consequence, trading schemes using commonly available information to beat the market are doomed to fail.
By stark contrast, the currently popular stance offered by behavioral finance, fueled by a number of apparent anomalies in the financial markets, regards market prices as subject to the psychological whims of investors. But without any appeal to psychology, Ross shows that neoclassical theory provides a simple and rich explanation that resolves many of the anomalies on which behavioral finance has been fixated.
Based on the inaugural Princeton Lectures in Finance, sponsored by the Bendheim Center for Finance of Princeton University, this elegant book represents a major contribution to the ongoing debate on market efficiency, and serves as a useful primer on the fundamentals of finance for both scholars and practitioners.
"Stephen Ross, a pioneer of the field, surveys and integrates modern finance in this lovely book. Much of the analysis is strikingly novel. For example, Ross emphasizes how mild limits on risk aversion can extend no-arbitrage arguments to say a lot about asset prices; he derives discount factor bounds in a unified way from the principle that more choices make you happier; he presents the 'random walk' result in a compelling dynamic-trading environment; and he closes with a careful dynamic contingent-claims analysis of the closed-end fund discount. This chapter exemplifies the neoclassical philosophy that patient, scientific study can eventually solve the hardest empirical puzzles."--John Cochrane, University of Chicago Graduate School of Business, author of Asset Pricing
"Neoclassical Finance is a must-read--a masterly development of neoclassical asset pricing theory by one of its most original thinkers. Stephen Ross not only provides a rigorous yet intuitive synthesis of pricing fundamentals, but also shows how these fundamentals offer a powerful alternative to many of the claims of behavioral finance."--Hayne E. Leland, Arno Rayner Professor of Finance and Management, University of California, Berkeley
Table of Contents:
CHAPTER ONE: No Arbitrage: The Fundamental Theorem of Finance 1
CHAPTER TWO: Bounding the Pricing Kernel, Asset Pricing, and Complete Markets 22
CHAPTER THREE: Efficient Markets 42
CHAPTER FOUR: A Neoclassical Look at Behavioral Finance: The Closed-End Fund Puzzle 66
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Published in association with the Bendheim Center for Finance, Princeton University