By Stephen F. LeRoy
This booklet introduces graduate scholars in economics to the subfield of economic economics. It stresses the hyperlink among monetary economics and equilibrium concept, devoting much less consciousness to in basic terms monetary subject matters equivalent to valuation of derivatives. given that scholars usually locate this hyperlink challenging to understand, the therapy goals to make the relationship specific and transparent in every one level of the exposition. Emphasis is put on distinctive examine of two-date versions, simply because just about all of the main principles in monetary economics could be built within the two-date surroundings. The research is meant to be similar in rigor to the simplest paintings in microeconomics; even as, the authors supply sufficient dialogue and examples to make the information without problems comprehensible.
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Extra info for Principles of Financial Economics
Thus, even though an equilibrium model of security markets is not explicitly employed, the requirement of no arbitrage makes the analysis consistent with an equilibrium. Bibliography 31 The assumption of no arbitrage plays a much lesser role in economics than in finance. The reason is that in economics the focus is on equilibrium analysis. Accordingly, the economist takes preferences, endowments, and so on, to be the primitives. There is no need to make a separate assumption that there is no arbitrage because the assumption of strictly increasing utility functions, which is generally made explicitly, guarantees that there will be no arbitrage in equilibrium.
This notion of arbitrage is clearly much stronger than that defined in the text, and thus exclusion of risk-free arbitrage is a very weak restriction. In fact, if no nonzero risk-free claim is in the asset span, then a risk-free arbitrage cannot exist, and exclusion of risk-free arbitrage is equivalent to assuming satisfaction of the law of one price. Absence of arbitrage or strong arbitrage at given security prices corresponds to the payoff pricing functional being strictly positive or positive.
8 is that agents have strictly concave expects utility functions with common probabilities and with Arrow–Pratt measures of relative risk aversion (see Chapter 4) that are everywhere less than one. A few further results on uniqueness exist. It follows from results of Mitiushin and Polterovich  (in Russian) that if agents have strictly concave expected utility functions with common probabilities and relative risk aversion that is everywhere less than four, if their endowments are collinear (that is, each agent’s endowment is a fixed proportion (the same in all states) of the aggregate endowment) and security markets are complete, then equilibrium is unique.