The Economics of Financial Markets presents a concise overview of capital markets, suitable for advanced undergraduates and for beginning graduate students in financial economics. Following a brief overview of financial markets - their microstructure and the randomness of stock market prices - this textbook explores how the economics of uncertainty can be applied to financial decision-making. The mean-variance model of portfolio selection is discussed, with analysis extended to the capital asset pricing model (CAPM). Arbitrage plays a pivotal role in finance and is studied in a variety of contexts, including the APT model of asset prices. Methods for the empirical evaluation of CAPM and APT are also discussed, together with the volatility of asset prices, the intertemporal CAPM and the equity premium puzzle. An analysis of bond contracts leads into an assessment of theories of the term structure of interest rates. Finally, financial derivatives are explored, focusing on futures and options contracts.
• Concise overview of capital markets • Emphasises economic principles • Companion website including a variety of online resources
Preface; 1. Asset markets and asset prices; 2. Asset market microstructure; 3. Predictability of prices and market efficiency; 4. Decision making under uncertainty; 5. Portfolio selection: the mean-variance model; 6. The capital asset pricing model, CAPM; 7. Arbitrage; 8. Factor models and arbitrage pricing theory, APT; 9. Empirical appraisal of the CAPM; 10. Present value relationships and price variability; 11. Intertemporal choice and equity premium puzzle; 12. Bond markets and fixed-interest securities; 13. Term structure and interest rates; 14. Futures markets - fundamentals; 15. Futures markets - speculation and hedging; 16. Futures markets - applications; 17. Swap contracts and swap markets; 18. Options markets: fundamentals; 19. Options markets - price determination; 20. Options markets - applications.
'This is a very well-written and thorough presentation of the key topics in financial economics - the book deserves to be widely adopted in support of courses in this dynamic area of teaching and research.' Peter Smith, Professor of Economics and Finance, University of York
'Roy Bailey has written a highly readable and comprehensive introduction to financial markets. He takes the reader carefully through relevant theories before describing how they relate to different financial markets. Students will benefit from Roy Bailey's rigorous but approachable style of writing.' Colin Mayer, Peter Moores Professor of Finance, Saïd Business School, University of Oxford
'Roy Bailey takes the rigourous economists approach and provides a detailed treatment of the underlying theoretical concepts. … provides complete coverage of the important concepts involved.' The Times Higher Education Supplement