Introduction to Financial Economics

Author: Song Fengming (Compiler)
Publisher:
Publish Date: 2006-05-01
Features: Financial economics, also known as financial theory, serves as the microeconomic theoretical foundation of finance. In essence, it is an extension of advanced microeconomics into uncertain economies. It focuses on discussing the valuation and pricing of financial assets, as well as risk management in financial markets. Therefore, it is an indispensable theoretical foundation for other important fields in finance, such as financial engineering, investment, corporate finance, and financial institution management. The book consists of ten chapters. Chapter 1 is an introduction, elaborating on the basic concepts and significance of financial economics. Chapter 2 discusses preferences, utility, and risk aversion, establishing the behavioral foundation of rational finance. Chapter 3, within the framework of a two-period model, utilizes the concept of Arrow-Debreu economies to explain the basic equilibrium model, which forms the foundation of the entire book. Chapter 4 discusses corporate valuation and related corporate finance issues in capital markets. Chapter 5 discusses the pricing of options under a two-period model. Chapter 6 introduces the concept of stochastic dominance and explains portfolio selection theory and the fund separation theorem, which are foundational to asset valuation and pricing. Chapter 7 introduces the mean-variance analysis method for the efficient frontier, providing the methodological foundation for later discussions of important pricing models. Chapter 8 explains the most important asset pricing models—the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT). Chapter 9 further extends to multi-period models, explaining the valuation and pricing of financial assets within a multi-period framework, i.e., dynamic asset pricing theory, thereby completely summarizing the fundamental theorems of financial economics. The final chapter 10 discusses equilibrium and asset valuation and pricing under incomplete and imperfect markets. The book systematically and comprehensively provides theoretical and foundational knowledge for professionals in the financial field. It can be used as a professional foundational textbook for upper-level undergraduate and graduate students in finance or related fields, as well as a reference for professionals working in banking and finance.