Winner of the prestigious Paul A. Samuelson Award for scholarly writing
on lifelong financial security, John Cochrane's Asset Pricing now
appears in a revised edition that unifies and brings the science of
asset pricing up to date for advanced students and professionals.
Cochrane traces the pricing of all assets back to a single idea--price
equals expected discounted payoff--that captures the macro-economic
risks underlying each security's value. By using a single, stochastic
discount factor rather than a separate set of tricks for each asset
class, Cochrane builds a unified account of modern asset pricing. He
presents applications to stocks, bonds, and options. Each
model--consumption based, CAPM, multifactor, term structure, and option
pricing--is derived as a different specification of the discounted
factor.
The discount factor framework also leads to a state-space geometry for
mean-variance frontiers and asset pricing models. It puts payoffs in
different states of nature on the axes rather than mean and variance of
return, leading to a new and conveniently linear geometrical
representation of asset pricing ideas.
Cochrane approaches empirical work with the Generalized Method of
Moments, which studies sample average prices and discounted payoffs to
determine whether price does equal expected discounted payoff. He
translates between the discount factor, GMM, and state-space language
and the beta, mean-variance, and regression language common in empirical
work and earlier theory.
The book also includes a review of recent empirical work on return
predictability, value and other puzzles in the cross section, and equity
premium puzzles and their resolution. Written to be a summary for
academics and professionals as well as a textbook, this book condenses
and advances recent scholarship in financial economics.
