Asset Pricing in Discrete Time: A Complete Markets Approach

— Covers asset pricing in a single period model, deriving a simple complete market pricing model and using Stein’s lemma to derive a version of the Capital Asset Pricing Model.

— Looks more deeply into some of the utility determinants of the pricing kernel, investigating in particular the effect of non-marketable background risks on the shape of the pricing kernel.

— Derives the prices of European-style contingent claims, in particular call options, in a one-period model; derives the Black-Scholes model assuming a lognormal distribution for the asset and a pricing kernel with constant elasticity, and emphasizes the idea of a risk-neutral valuation relationship between the price of a contingent claim on an asset and the underlying asset price.

— Extends the analysis to contingent claims on assets with non-lognormal distributions and considers the pricing of claims when risk-neutral valuation relationships do not exist.

— Expands the treatment of asset pricing to a multi-period economy, deriving prices in a rational expectations equilibrium.

— Uses the rational expectations framework to analyse the pricing of forward and futures contracts on assets and derivatives.

— Analyses the pricing of bonds given stochastic interest rates, and then uses this methodology to model the drift of forward rates, and as a special case the drift of the forward London Interbank Offer Rate in the LIBOR Market Model.