Financial markets

Abstract

The module begins with a brief review of asset pricing and market efficiency. The unifying organising asset pricing principle that is used is the stochastic discount factor model. This provides an arbitrage-free theory of asset prices. The lectures are mainly concerned with the application of this concept, and with the empirical evidence on the related concept of market efficiency. If assets are priced correctly then financial markets are behaving efficiently, and if they are mis-priced then financial markets are not efficient and opportunities may exist for profitable arbitrage.