Asset Pricing: Revised Edition

by John H. Cochrane

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.

Genres: Finance, Economics, Textbooks, Reference, Money

568 pages, Hardcover

First published January 8, 2001

Reviews

[Zo · Rating 5 out of 5]

A paragon of what a textbook should be. Extremely clear and thorough, while doing a great job of mentioning open avenues of research and things not yet understood — which makes things far more exciting. The book is coherently organized around the “fundamental equation of asset pricing.” Cochrane convincingly shows that the equation is a powerful, and beautiful, way of understanding asset pricing. And the architectural nature of the framework makes the book great for gradually building understanding. I came into this as a near beginner, and though I still far from thoroughly understand many parts, walk away feeling like I can actually read and engage with the literature on that topic. Most important — I walk away feeling genuine fascination at the many puzzles as yet unanswered. Me of even one year ago would be pretty shocked to hear that the first textbook I ever read cover-to-cover was a finance textbook, and that I loved it. I guess interests, like prices, sometimes follow a random walk.

[Kevin K. Gillette · Rating 5 out of 5]

Prof. Cochrane brings enthusiasm and extraordinary insights into this exciting domain within mathematical finance. He shares results from the work of recent Nobel laureates Gene Fama and Lars Peter Hansen, both colleagues of his at the Booth Graduate School at University of Chicago.

Asset pricing is a subject that relies heavily on the Ito calculus, an example of stochastic calculus that has contributed to numerous results, including the famous Black-Scholes-Merton formula for pricing derivatives. The Ito framework, even when applied to finance, requires a firm grasp of measure theory (caution to the reader). However, Cochrane is good at disclosing those results essential to making sense of the math, so a complete background in real analysis is not necessary.

And if that weren't enough: Prof. Cochrane has offered a course in Asset Pricing through the MOOC source, CoursEra.org. I have communicated with him, and he tells me that the next offering of this free on-line course should be either later in the Spring or the Fall of 2014. In terms of material, it is the same content that is taught to Ph.D. candidates in finance at Booth, so there is some rigor involved - but Prof. Cochrane's enthusiasm and personality make it well worth the investment of time and head-scratching.

[Yasiru]

This is a really important book (also a course called Asset Pricing on Coursera) with an enlightening and encompassing modern perspective, but the deferred rigour can be nothing less than aggravating. I've had to refresh things minutely from old uni notes to keep up with the subtleties of the discussion. Will update here how it goes.

[Kristofer · Rating 4 out of 5]

This is really a 3.5 star book. Mainly because the second half isn't as strong as the first. The first half starts off with an impressive derivational approach to financial econ that will be much appreciated by students used to more dogmatic teachers. However, as the book progresses derivations get less rigorous, perhaps due to the field being in flux, but to a degree that some readers (especially non-PhDs) in the subject may get left behind.

[Qiswrk Harle · Rating 3 out of 5]

pure theory

[Michele Schincaglia · Rating 5 out of 5]

Masterpiece of Finance theory. Sometimes a bit cryptical, but nonetheless the most insightful and encompassing book on the subject.

[Yuekun Liu · Rating 5 out of 5]

Actually I haven’t finish reading it yet. However, this is the greatest textbook so far I met. John Cochrane is a wise person who could make tough things easier to understand. And he is contagiously enthusiastic. People who are interested in asset pricing can also visit his juicy personal website and watch his online course: https://class.coursera.org/assetprici....

Hmm…Read some baby physics may increase the enjoyment because of the reflection in either the principal and the attitude.

In any case, I am deeply grateful for the professor who teaches this class and his knowledge made him as attractive as a blackhole. It’s really a blessing.