Financial Economics

PREFACE

There are many excellent finance textbooks for undergraduate and MBA courses. However, to us those textbooks could benefit from offering more economic reasoning and from showing how that reasoning derives from theoretical models. On the other hand, books at the doctoral level can be too detailed and unnecessarily complex. Hence, this textbook attempts to fill a gap by providing rigorous coverage aimed at assisting undergraduate and master's level students to understand better the principles and practical application of financial economic theory. In addition, the book can serve as a supplemental reference for doctoral students in economics and finance, as well as for practitioners who are interested in knowing more about the theory and intuition behind many common practices in finance. The book selectively covers recent research findings and presents them within a structured framework. In short, the book focuses on economic principles and on putting these principles to work in the various fields of finance—financial management, investment management, risk management, and asset and derivatives pricing.

After our introductory chapter sketches the book's approach, we organize our survey in eight parts. The traditional findings of neoclassical financial economics, the subject of Part I, examine finance in a certainty world with a perfect capital market. In Part II we sketch the real-world institutional setting of financial economics, describing the essential elements of a modern ...