Risk Finance and Asset Pricing: Value, Measurements, and Markets

Introduction

At both theoretical and practical levels, finance theory has made extraordinary intellectual strides while contributing immensely to economic development. At the same time it has enriched the many financial engineers able to innovate and trade in financial products that create greater liquidity, predict and price assets, manage financial risks, and contribute to the growth of financial markets.

Today, risk finance and engineering is confronted with immense challenges and opportunities. They include:

• Bridging theory and practice following the important contributions made these past decades by Kenneth Arrow and Gerard Debreu’s fundamental theory of asset pricing and its many uses to better comprehend the working of financial markets and price assets and their derivatives.

• Reconciling the doubts raised by assumptions of fundamental finance and opportunities to profit by the initiated who can appreciate the pro and cons of these theories.

The motivation for this book arose in the course of my lectures in the Department of Finance and Risk Engineering at the New York University (NYU) Polytechnic Institute following the financial meltdown of 2008-2009. This was a year when risks and all their financial manifestations struck at the heart of financial citadels and world economies. No firm was too big to fail, and risks hitherto conceived of theoretically, ignored, or only dreamed of have revealed their potency. This was also a year when extreme events have come into their ...