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Some recent developments in capital market theory: A survey

Author

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  • Richard C. Stapleton

    (University of Strathclyde, Department of Accounting and Finance, Curran Building, 100 Cathedral Street, Glasgow G4 0LN, Scotland)

Abstract

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 over-pricing 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 American-style swaptions. The paper will survey the most important recent models in the literature, each of which satisfies the fundamental no-arbitrage property. It will discuss the implications of the models for the pricing of both European-style and American-style options.

Suggested Citation

  • Richard C. Stapleton, 1999. "Some recent developments in capital market theory: A survey," Spanish Economic Review, Springer;Spanish Economic Association, vol. 1(1), pages 1-20.
    • Handle: RePEc:spr:specre:v:1:y:1999:i:1:p:1-20
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    Keywords

    Background ris; Term structure;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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