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Utility Theory

In: Advanced Finance Theories

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  • Ser-Huang Poon

Abstract

This chapter derives asset prices in a one-period model. We derive a version of the Capital Asset Pricing Model (CAPM) using a complete market, state-contingent claims approach. We define the forward pricing kernel and then use the assumption of joint normality of the cash flows and Stein’s lemma to establish the CAPM. We then derive the pricing kernel in an equilibrium representative investor model. But first, we need to understand a few properties of utility function…

Suggested Citation

  • Ser-Huang Poon, 2018. "Utility Theory," World Scientific Book Chapters, in: Advanced Finance Theories, chapter 1, pages 1-4, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814460385_0001
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    More about this item

    Keywords

    Intertemporal Portfolio Selection; Capital Structure; General Equilibrium; Spanning; Mutual Fund Theorem; Jumps; Incomplete Markets;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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