Financial Economics: Classics and Contemporary is a graduate level book forthcoming with MIT Press (> 1,000 pages)
Please email me to enquire about availability of sample chapters of Financial Economics whilst using an official account (e.g., university, bank, government) and indicating the reasons for your enquiry. Thank you!
Top maps: Illustration of the increased efficiency in maritime routing allowed by the Suez Canal (right panel) opened in 1869, and the Panama Canal (left panel) opened in 1913, two amongst the most enduring technological marvels with global economic and political implications.
Bottom left: A 75 year 3% coupon bearing bond issued by the Panama Canal Company (“Compagnie Universelle du Canal Interocéanique de Panama”) in October 1884. The company defaulted in 1889 under the leadership of the Count Ferdinand de Lesseps, who during 1858 had also founded the Suez Canal Company (“Compagnie Universelle du Canal Maritime de Suez”).
This book originates from notes I wrote in support of graduate and advanced undergraduate lectures in financial economics, macroeconomic dynamics, financial econometrics and financial engineering. These notes have circulated for about 20 years under the title Lectures on Financial Economics. The book comprises three parts, broadly described in a moment. The Introduction contains a great deal of details and motivation regarding this work. I would recommend the reader to refer to this Introduction for a much better introduction to my work than the streamlined description below.
“Part I: Foundations” provides primordial tools of analysis and the historical context underlying the analysis contained in more advanced parts of the book. It deals with such disparate topics as portfolio selection, option pricing, dynamic consumption- and production- based asset pricing, the intricacies underlying incomplete markets and other market imperfections, introductions to models with asymmetric information, theories of financial contracting, theories of debt, and, finally, some standard but also relatively more modern methods of statistical inference. It relies on analytical frameworks set in both discrete and continuous-time.
“Part II: Empirical lessons and market inefficiencies” explains the main empirical facts and the challenges these facts pose to financial economists: excess price volatility, countercyclical financial market volatility, cross-sectional puzzles, or liquidity and information efficiency. In more detail, this Part reviews models in which agents face idiosyncratic risk, Knightian uncertainty, have heterogenous beliefs and learn about their ever-changing environment, face financial constraints, invest in assets subject to bubbles, or generate feedback effects (from capital markets to business cycle developments). It, then, organically addresses core questions regarding market inefficiencies, limits of arbitrage, asymmetric information, coordination failures, financial crises, or the organization of markets.
“Part III: Asset pricing and reality” aims to bring fruition the lessons drawn from Part II and cope (through the main analytical tools in Part I) with the main challenges posed by actual capital markets, arising from option pricing and trading, interest rate modeling, or credit risk and the associated derivatives. In a sense, Part II is about the big puzzles we face in fundamental research, while Part III is about how to live within our current and certainly unsatisfactory paradigms, so as to cope with demand for intellectual expertise.