Claus Munk: Financial Asset Pricing Theory
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Claus Munk: Financial Asset Pricing Theory Oxford University Press, 2013, 600 pages, approx. £75 Igor Pozdeev1
Published online: 20 July 2016 © Swiss Society for Financial Market Research 2016
Asset pricing, arguably the very essence of academic finance, emerged rather late as a separate field. Results documented by many researchers, including Markowitz, Sharpe, Lintner and Mossin, Black and Scholes, and Fama and French, were long treated as distinct phenomena and referenced in books on investment decision theory, corporate finance, and derivatives pricing. There was no unified framework until the stochastic discount factor (SDF) was introduced and put into the basic relation “price equals discounted payoff.” Asset pricing brought utility theory under the same roof with the many pricing approaches developed earlier. Because of its recent emergence and somewhat technical and abstract content, the field has seen only a few books, the most prominent being Cochrane (2001) and Back (2010). These books target Ph.D. students and academics and differ in the rigor of mathematical apparatus and coverage of empirical methods. Munk (2013), with elaborate derivations, extensive treatment of continuous-time models, and the lack of empirical methods overview, is more similar to Back, but caters to a broader audience including master-level students and practitioners, discusses certain neglected topics, such as nominal versus real prices and the existence of a representative investor, and is definitely a valuable addition to the universe of texts on asset pricing. Munk introduces new concepts sequentially as need arises; hence, the 13 chapters of the book cannot be meaningfully aggregated into a few large parts. The author refrains from following the conventional schedule of (1) define the investor’s decision problem, (2) derive the optimality condition, and (3) relate the investor’s utility and the SDF, but instead starts with the latter as “something” capable of pricing assets in the most general way, determines its properties, previews alternative pricing models, and only then
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Igor Pozdeev [email protected] Swiss Institute of Banking and Finance, Rosenbergstr. 52, 9000 St. Gallen, Switzerland
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moves on to the framework where the SDF is related to investors’ utility. Each chapter is structured in the same way and begins with an overview of the issue, continues with derivations in discrete and continuous time, and ends up with a discussion of nominal versus real quantities and of dividends versus returns. Mathematical derivations tend to be detailed, comprehensible without external reference, and easy to follow given some knowledge of linear algebra, functional analysis, and probability. Chapter 1 introduces the main problems of asset pricing and describes the way researchers have been trying to solve them. Basic notions such as dividends and returns are delineated, and stylized facts about returns on markets in a variety of countries are given. Since uncertainty about future wealth is the basis of
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