1. Introduction

1.1 Why?

1.2 No Arbitrage

2. State Price Assets

2.1 Introduction to State prices

    Contingent Claims

    State Assets

    Risk free assets and state prices

    State prices in discrete space

2.2 Numerical example of state prices

    Finding State Prices

2.3 Incomplete markets

2.4 Summary

2.5 Resources

3. Stochastic Discount Factors

3.1 Introducing Stochastic Discount Factors

3.2 Constructing the SDF

    Complete Markets

    Incomplete Markets

3.3 Reminder

3.4 SDF Assumptions

    Free Portfolio Formation

    Law of One Price

    Incomplete Markets

3.5 Completing Markets in Continuous State Space

3.6 Introducing Time

    Filtration

    Martingale

    Conditions

4. SDF and Utility

4.1 Utility functions

4.2 Utility based basic pricing equation

4.3 Complete markets

4.4 Power Utility

4.5 Types of model

4.6 One asset and two investors

4.7 Explaining Empirical Data

    Data Challenges

    Habit Formation

5. Risk, Return and Correlation

5.1 General Equilibrium Models

5.2 Beta Representation

5.3 Covariance and SDF

5.4 Mean-Variance Frontier

5.5 Orthogonal Decomposition

5.6 2 Fund Theorem

5.7 Building an SDF from the market portfolio

5.8 Bounds on the SDF

5.9 Factors

5.10 Risk free

5.11 Conditioning

6. SDF links to CAPM, NPV, Certainty Equivalence, Risk Neutral Pricing

6.1 Capital Asset Pricing Model (CAPM)

    Introduction

    Derivations

    Applications

    Assumptions and Value Functions

6.2 Linearizing Nonlinear Models

    Stein’s Lemma

6.3 Intertemporal CAPM (ICAPM)

6.4 Arbitrage Pricing Theory (APT)

6.5 APT vs. ICAPM

6.6 Conclusion

6.7 Net Present Value

6.8 Risk Neutral Probabilities

6.9 Real World Probabilities

6.10 Certainty Equivalent Values

6.11 SDFs: Bridging Approaches

7. Generalised Method of Moments

7.1 Generalized Method of Moments (GMM)

7.2 Applying GMM

7.3 Choosing the weighting matrix

7.4 Cross-Sectional and Time Series Regression

7.5 GLS Cross-Sectional Regression

7.6 GMM and stochastic discount factors

7.7 GMM Summary

8. Empirical Facts

8.1 Empirical Equity Risk Premiums

8.2 Estimation Approaches: Historical Premiums

8.3 Estimation Approaches: Survey and Manager Premiums

8.4 Estimation Approaches: Implied Premiums

8.5 Empirical Work in Asset Pricing

8.6 Empirical Properties

8.7 Empirical Factor modelling

9. Bonds

9.1 Bonds

9.2 Vasicek Model

9.3 Cox-Ingersoll-Ross (CIR) Model

9.4 Multifactor Affine Model

10. Options

10.1 Financial Options

     Method 1 - Solve the SDF forwards

     Method 2 - Solve the PDF Backwards

10.2 Comments on Option Pricing

10.3 Good Deal Bounds

10.4 Real Options

10.5 Discount Rates and Real Options

10.6 Valuation Approaches

10.7 SDFs and Real Options

11. Model Building

11.1 Model Building

11.2 Multivariate Log-Normal Model

11.3 Mean reversion and forwards

11.4 Mean reversion, forwards and risk premiums

11.5 Mean reversion and beta

11.6 Exchange Rates

Main Reference Book