Principles of Financial Economics

Who this book is for

For graduate students who want to understand why asset prices follow from an economic model, rather than learn a catalogue of trading formulas. It suits a theory course after undergraduate economics and a reader willing to work through formal arguments.

Prerequisites

Be comfortable with microeconomic optimization, matrix algebra, multivariable calculus and probability. Review state-contingent payoffs before attempting the proofs.

What it covers

The treatment develops equilibrium, valuation and the allocation of risk, using two-date economies to make the assumptions visible. Portfolio restrictions and infinite-horizon markets extend that framework. Its emphasis is the connection between individual choices, market clearing and prices, rather than a practical survey of derivative products.

How to use it

Draw the payoff matrix for a small example before following the general argument. For each result, list its assumptions and distinguish a no-arbitrage conclusion from an equilibrium conclusion. Rework examples with a missing security to see which pricing claims survive. Follow your course sequence when moving to infinite-horizon models.

Edition and sources

This record identifies the 2014 second edition, paperback ISBN 9781107673021, checked against the Cambridge frontmatter. The Minnesota ECON 8705 syllabus assigns this edition for Part 1 in Spring 2024, Session III; it does not specify the binding. See the publisher record for access options; the available frontmatter is not a free full book.