Some recent developments in capital market theory: a survey
This paper surveys some recent developments in the theory of capital markets. Particular emphasis is given to two strands of the literature. The first covers some recent and fundamental extensions to the theory of risk aversion and the demand for risky assets. These papers are concerned with the effect of non hedgeable background risk on risk attitudes. The important implications for finance are for the size of the risk premium (the equity premium puzzle) and for the demand for and pricing of contingent claims. For example, background risk may help to explain the apparent overpricing of options on equity indices. The second topic is interest rate term structure models. Stochastic term structure models try to capture the possible future shapes of the term structure of interest rates. This is relevant for the pricing of contingent claims, in particular for the pricing of interest rate derivatives such as Americanstyle swaptions. The paper will survey the most important recent models in the literature, each of which satisfies the fundamental noarbitrage property. It will discuss the implications of the models for the pricing of both Europeanstyle and Americanstyle options.
Year of publication: 
1998


Authors:  Stapleton, R C 
Publisher: 
The Department of Accounting and Finance 
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