Asset Pricing and Portfolio Choice Theory, Financial Management Association Survey and Synthesis Series, 1st edition, Kerry Back

"Kerry Back has created a masterful introduction to asset pricing and portfolio choice. It is easy to foresee this text becoming a new standard in finance PhD courses as well as a valued reference for seasoned finance scholars everywhere. The coverage of topics is comprehensive, starting in a single-period setting and then moving naturally to dynamic models in both discrete and continuous time. The numerous challenging exercises are yet another big strength. In short, an impressive achievement."--Robert F. Stambaugh, Miller Anderson & Sherrerd Professor of Finance, The Wharton School, University of Pennsylvania


"Kerry Back offers us a rigorous, but accessible treatment of the asset pricing theory concepts that every doctoral student in finance should learn. A distinguished scholar in the field provides a presentation that is clear yet concise, and at the end of each chapter exercises that are an invaluable pedagogical tool for both students and instructors."--Eduardo Schwartz, California Chair in Real Estate and Land Economics, UCLA Anderson School of Management


"In Asset Pricing and Portfolio Choice Theory Kerry Back has given us a comprehensive, rigorous and at the same time elegant and self-contained treatment of the important developments in this vast literature. It will be useful to graduate students and advanced undergraduate students in economics, finance, financial engineering, and management science as well as interested practitioners."--Ravi Jagannathan, Chicago Mercantile Exchange/John F. Sandner Professor of Finance and a Co-Director of the Financial Institutions and Markets Research Center, Kellogg School of Management, Northwestern University

I am in the EDHEC PhD program, and we are using this book, instead of Merton's ConTimeFin, or Cochrane for our course Continuous Time Financial Economics.

Kerry Back's clarity is the main utility here. He does spend a *lot* of time on the binomial model (discrete time) before extending it to ConTime, but this grounding helps in the intuition.

Probably the best pedagogic layout of Ito's formula I've ever encountered, and this thoroughly covers Black Scholes, and asset pricing through Heleyete Geman's final extension.

Back's work benefits from all previous work in computational and continuous time finance in that more (not all) of the mathematical notation is standardized.

However, some of his choices for superscripts and subscripts strike you as odd, particularly if you've come from an MSF that emphasizes, say, John Hull's notation (most), or an MSFE (Carnagie Mellon) that emphasizes Merton's notation. Those coming to a PhD in Finance from Engineering or pure or applied Math will face a new, but slope familiar curve with comprehending the notation.

So the admonition in Financial Mathematics that you really have to pay attention to the author's sometimes idiosyncratic choices for mathematical notation remains, but Kerry Back has (to his credit) extensively used that which is agreed upon or in general consensus in this volume, so it is in fact easier to read (n relationship to other books) than say, Merton or Oksendal.

And so here a word on difficulty. This is not Oksendal. This is not Shreve and Karatzas. Those would be more appropriate for a PhD in Financial Mathematics, not a PhD in Finance.

So why four stars instead of five?

Typos, really. Kerr Back has the errata sheet on his website, but still...for a premium priced book the copy editing was supposed to be better than this. It isn't HORRIBLE (like, completely unedited, like some publishers ( "Wiley" )) but you'd expect better from Oxford University Press. And the errata sheet doesn't correct just minor stuff, some key items can throw the first-time-in-the-subject-reader way off on a useless tangent, wasting time and creating initial confusion. So get that errata sheet (the publisher should actually include it with the volume...my copy did not have it).

So in short, this is a great, clear, readable, and understandable Finance PhD level treatment of asset pricing that is a good choice for a variety of courses on continuous time asset pricing and financial economics. With the errata sheet and your hand made corrections, it is an excellent book. It is too light for a Financial Mathematics PhD, but a solid basic or supplemental text.

I'm a PhD student in finance at a top 10 US business school and must say I completely disagree with yamie2005. I find Kerry's book to be very well written, and its organization is much more logical than Cochrane's. I have a background in math and stats, and find Kerry's writing style to be very clear and concise (as opposed to Cochrane). However, I can see why students with a less rigorous background may prefer Cochrane. Kerry doesn't cover the same topics as Cochrane: Cochrane covers asset pricing theory in Part I of his book (chap 1-9), empirical asset pricing in Part II (chap 10-16), bonds and options in Part III (chap 17-19) and finishes with an empirical survey in Part IV (chap 20-21). I do like Cochrane's chapters on empirical asset pricing a lot, but find his writing style for the theory parts to be lengthy and not rigorous enough. Kerry focuses only on asset pricing theory (including some chapters on continuous time), and does this in much more detail than Cochrane - the two books have roughly the same number of pages. For instance Kerry contains chapters on Epstein-Zin preferences, asymmetric information and other topics not found in Cochrane. However, to me the most important thing about Kerry's book is his clear, logical, and thorough coverage of standard topics in single-period and dynamic models (part I and II). Compared to Cochrane, Kerry is much clearer about e.g. HJ-bounds, representative investors, dynamic programming, and the ICAPM. Conclusion: Use Kerry for the theory and Cochrane for the empirics.

Having gone through four financial economics classes at the PhD level and numerous other books (Cochrane, Ingersoll, Duffie, Pennachhi), I have found this to be the best book.

First, it is not cryptic. You understand what the flow is, where we came from and where we are going next, and why are we going there. This may sound simple and obvious, but it is not, especially when you follow the other books.

Chapters 1-11 go through the introductory/foundational concepts such as RRA, SDF, Welfare theorems, Arrow-Debreu securities, Arbitrage, Euler equations, Dynamic programming, Bellman Equations, Representative agent, complete and incomplete markets, habit models, equity premium puzzle etc., in detail.

Chapters 12-22 go through continuous time concepts, Ito's process, Radon-Nikodym derivatives, Beta pricing, HJ bounds, Change of numeraire, CAPM, ICAPM, Option pricing models without solving PDEs, Deep dive into option pricing using SDF and change of measure. The whole approach focuses on SDF related math.

All in all, it is a great book because another eloquent professor (who knew the old books and this book, and took pain to relearn the old techniques) taught this subject. If someone else taught it, I don't know if I would have appreciated this book to the same extent.

Product Details :
Hardcover: 504 pages
Publisher: Oxford University Press, USA; 1 edition (September 10, 2010)
Language: English
ISBN-10: 0195380614
ISBN-13: 978-0195380613
Product Dimensions: 6.5 x 1.2 x 9.3 inches

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