Dynamic Asset Pricing Theory, Third Edition.

Book Description

This is a thoroughly updated edition of Dynamic Asset Pricing Theory, the standard text for doctoral students and researchers on the theory of asset pricing and portfolio selection in multiperiod settings under uncertainty. The asset pricing results are based on the three increasingly restrictive assumptions: absence of arbitrage, single-agent optimality, and equilibrium. These results are unified with two key concepts, state prices and martingales. Technicalities are given relatively little emphasis, so as to draw connections between these concepts and to make plain the similarities between discrete and continuous-time models.

Readers will be particularly intrigued by this latest edition's most significant new feature: a chapter on corporate securities that offers alternative approaches to the valuation of corporate debt. Also, while much of the continuous-time portion of the theory is based on Brownian motion, this third edition introduces jumps--for example, those associated with Poisson arrivals--in order to accommodate surprise events such as bond defaults. Applications include term-structure models, derivative valuation, and hedging methods. Numerical methods covered include Monte Carlo simulation and finite-difference solutions for partial differential equations. Each chapter provides extensive problem exercises and notes to the literature. A system of appendixes reviews the necessary mathematical concepts. And references have been updated throughout. With this new edition, Dynamic Asset Pricing Theory remains at the head of the field.

Customer Reviews:

painful and obscure.......2005-12-24

The mathematics of finance is not trivial, but neither is it really all that difficult; nevertheless, Duffie works to make you think that it is.

I maintain a scale of good versus bad mathematics writing in my head, against which I calibrate books I read. This scale stretches from, at one end, the faculty of Moscow University, in particular Israel Gelfand, Vladimir Arnold and Andre Kolmogorov, all of whom manage to explain to me hard things so that they seem easy, to, at the other, Darrell Duffie.

Finance for economists.......2005-04-27

This book provides the most elegant and coherent synthesis of finance theory, in a complete markets and frictionless settings.

For the reader interested in the theoretical foundations of modern financial models, this book has three main advantages over many of its competitors:

- It clearly shows the link between modern finance theory and the 40-year old Arrow-Debreu model. As this book will make clear, financial assets can be viewed as "bundles" of Arrow-Debreu contingent goods, and pricing kernels are simply extensions of Arrow-Debreu contingent state prices.

- It bridges the gap between arbitrage models on one hand, and models based on consumption, optimization/dynamic programming and general equilibrium on the other hand. Absence of arbitrage guarantees the existence of a stochastic discount factor, or pricing kernel. Optimality implies that the stochastic discount factor must be equal to the investors' intertemporal marginal rate of substitution.

- It provides a unified treatment of discrete-time and continuous-time models. Many finance textbooks focus on the mathematic tools and emphasize the difference between continuous-time and discrete-time tools--usually at the expense of the economics underlying both types of models. In contrast Duffie's book emphasizes the conceptual unity between continuous-time and discrete-time asset pricing.

This book was written more for students and academics than for pratictioners. It is not a reference or a recipe book for traders and programmers. Several chapters are devoted to general-equilibrium models that pratictioners are not likely to find useful. However, the essentials of derivative asset pricing and the term structure are also covered. The latest edition even includes a chapter on corporate finance.

Finally, this book is pretty much self-contained. All the graduate-level math results used in the proofs are presented either in the main body of the book, or in appendices.

Demanding but rewarding!.......2003-09-30

First of all, this book is for people with advanced mathematical preparation. Courses in functional analysis, measure theory, stochastic calculus and vector space optimization are in my opinion required for a deep understanding of the material in the book. Fortunately, the appendices are very good and provide many things that can help someone to follow the book.
In the first four chapters the writer develops the discrete-time theory,in order to provide a better understanding of the underlying ideas which remain the same in the next chapters which deal with the continuous-time setting.
Although the book needs a lot of effort from the reader, it is unique in that can help you see beyond the mathematics. In other words it USES the mathematics and it isn't just a layout of theorems and proofs.
Of course it can't be compared with books like Hull as it isn't accessible to everyone. But someone with the mathematical preparation , who has read Hull , should buy this book and he will never regret it.

best intro of finance for math guys.......2001-12-03

I am taking a phd level course which uses this book. For math guys, SDE and MG theory covered in this book are fine, but it is still somekind of tricky to fill in some details of proof. As author said, the latter chapters are just repeating the first two chapters in a fancy math way. It is better to understand the first two chapters very well and then go further. For optimal portfolio and consumption part, I prefer Merton's notes and his CTF. Whatever, this book is great and very neat for integrating the whole theory.

A tricky book.......2001-11-03

This book, whilst being very impressive i didn't really find helpful as a learning tool. A good knowledge of the subject is required otherwise it is almost impossible to follow.

I'm studying a masters in finance, and would say it goes well beyond what we need to know for such a course. Maybe maths & finance students would cover things in this.

I am amazed that people actually use such a comllicated book in practice!!

Average customer rating:

Way overhyped and unconvincing

an informative book on portfolio investment

An excellent book on portfolio management

Real World Portfolio Optimization

Has MPT Become Less Relevant for Investors?

Dynamic Portfolio Theory and Management
Richard Oberuc
Manufacturer: McGraw-Hill
ProductGroup: Book
Binding: Hardcover

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Book Description

An exciting new model for improved asset allocation accuracy in every market environment

Modern Portfolio Theory (MPT) and asset allocation are the foundations on which most institutional investors base their decisions.

But many aspects of MPT weren't designed for today's fast-changing markets.

Dynamic Portfolio Theory and Management introduces a time-adaptive procedure that addresses this issue and simplifies the decision-making process.

While asset allocation programs must adapt themselves to changing market conditions to succeed, how to accomplish that has been another matter. This book reveals a new model that:

Helps investors change allocations based on economic factors
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Customer Reviews:

Way overhyped and unconvincing.......2006-05-25

Richard Oberuc has collected together a reasonable collection of formulae, charts, tables and academic references for this book. However most of the material can be found for free on the internet and he draws little original conclusion himself. The so-called "Dynaporte"(TM) just appears to be a classical factor model of the type that's been around for years. The book ends up feeling like a high school dissertation - pretty vacuous. For a serious read on portfolio theory try books like the classical approach of Grinold & Kahn, or more recent texts by Amenc or Scherer. Carol Alexander's "Market Models" also has an excellent section on factor models and lots more. Also worthy of recommendation is the 2005 text by Focardi & Fabucci "From CAPM to Cointegration" - superb for serious students.

an informative book on portfolio investment.......2003-12-16

This is an impressive, sparking and informative book, aiming at explaining and implementing the methodology of dynamic portfolio management. I enjoyed very much reading through. This well-organized book essentially covers two parts.

The first part, from Chapter 1 to 9, contains a concise survey of the academic innovations in portfolio management in the past five decades, with the author's useful insights on these models and evidence. In particular, it emphasizes on the idea of dynamic portfolio allocation, which uses broad economic information to actively manage investment allocation. This part contains not only elegant models but also insightful intuition, so that this book becomes readable to virtually anyone interested in portfolio investment and management. So I think it can be an excellent reference for both doctoral students and financial practitioners in this field.

The second part advocates DynaPorte investment model that links asset allocations directly to economic factors. DynaPorte represents innovations of incorporating economy-wide information into your portfolio formation, which is the essence of dynamic portfolio management. Moreover, the recent academic evidence against the Random Walk Hypothesis has opened the door to superior long-term investment returns through such kinds of active investment management. I believe that the DynaPorte can help improve the practitioners' understanding of dynamic investment and thus make better use of various kinds of information.

An excellent book on portfolio management.......2003-12-03

This is one of the best practically-oriented books on portfolio management that I ever read. It contains a lot of useful information on factors influencing portfolio returns and approaches for building portfolios. I really enjoyed reading this book containing rigorous formulations and relevant references, but not overloaded with math. I am advising to read this book to everybody who is interested in practical finance and relevant issues. Especially, I am impressed with the formulation of the DynaPorte model in Chapter 10. The portfolio optimization model accounts for direct impact of fundamental factors driving securities returns, however it does not need to evaluate a covariance matrix. The portfolio optimization problem is formulated in a linear programming framework leading to robust and fast algorithms.

Real World Portfolio Optimization.......2003-10-22

This book represents a true leap forward in the state-of-the-art for real world portfolio optimization issues. For too long people have used Modern Portfolio Theory's static approach to allocate assets according to historical return and standard deviation. The DynaPorte approach identifies the significant macro factors that affect returns and risk and uses these as dynamic inputs to the asset allocation decision. Unlike most books of this type, the author provides detailed simulation backup to prove the effectiveness of DynaPorte on real data. The careful reader...whether private investor, pension fund consultant or money manager...can learn a lot from this book, especially about how to adjust a portfolio as the macro environment changes. The book also provides further evidence of the importance of diversifying assets beyond typical stock/bond allocations to include alternative investments such as hedge funds.

Has MPT Become Less Relevant for Investors?.......2003-09-30

Most of us have been very disappointed with the Markowitz approach to investing. The efficient frontier sounds great in theory, but has failed badly in practice. In the late 90's, investors missed the upside because the market was too overvalued. During the last three years, they were over-invested in equities because the theory wasn't sensitive enough to catch the short-term changes in time.

Intuitively, we know that the market responds to changes in economic inputs. The trouble is, we don't know which inputs carry the most weight, which ones lead or lag and when they are the most powerful. Dynamic Portfolio Theory is the first book to look at many studies by other research professionals in order to sort through the clutter of hundreds of indicators and rank the indicators according to their prominence in these other studies.

Oberuc's approach to portfolio construction removes the problems of trying to determine expected rates of return, co-variances and volatilities. He has developed a model called Dynaporte that has the distinct advantage of being able to respond to changing market conditions as they occur by linking the asset allocations to changes in macro-economic variables. Although the book is not intended for math-phobic readers, it supplies sufficient theory to satisfy inquiring minds. However, for those of us without advanced statistics proficiency, the conceptual discussions provide plenty of meat to chew on.

He questions each of the Markowitz assumptions and compares their value in predicting portfolio performance to those used in the DynaPorte model, a multi-variate linear regression technique technique based on macro-economic and market based inputs. For example, the clear explanation surrounding the relative merits of mean variance, downside variance and mean absolute deviation as risk measures is highly enlightening. This and similar examples alone make the book worthwhile, as so many investors have used the MPT model without understanding why they are doing so.

Separate chapters are devoted to indentifying and developing the best indicators for stocks, bonds, interest rates and pieces of hedge funds. Starting with perhaps 20 inputs, the DynaPorte model reduces down to the best ones, perhaps 5 or 6 of the most statistically significant. Unlike neural networks, which take multiple inputs and screen them in mysterious ways to derive those which track historic performance most closely, the DynaPorte model shows why certain independent variables are being retained and others discarded. Each variable is scored by its t-score, R-squared and other measures.

What makes the process fit together is the integration of each of the individual models into time-sensitive efficient portfolios. Oberuc devotes a full chapter to the recent literature studies discussing both the difficulties of getting good inputs for data and the tests for predictability of market returns. Again, a chapter worth the price of the book.
Whether it's called market timing, tactical asset allocation or chopped liver is not really important. What counts is whether the historic in-sample results translate into out-of-sample portfolio benefits. In this case, it's enough to make a market timer weep tears of joy and wear the label with pride.

In-sample optimization of a stock, bond and t-bill portfolio from 1980 through 2001 showed a 5% annual excess return over a pure stock portfolio with substantially lower volatility. Another study, using Fidelity sector funds did even better. Both studies accounted for transaction costs. Out of sample results were comparable. More remarkably, the portfolios continued to rise during the post-bubble period.

It is important to note that the results discussed in the book did not just fall out of the massaging of the inputs. Many different combinations were tried over many months before coming up with a satisfactory model that fit the market's behavior. The techniques described are not a magic bullet. However, with increasing interest in tactically using index funds and multiple style portfolios, those tools able to handle a dozen or more market sectors rapidly deserve attention.

Whether the reader can construct portfolios like those achieved in the book is not why it should be bought. The real benefit is in the full-featured discussion of all of the factors that go into making a robust modeling system and as a significant contribution to modeling literature. Consultants and portfolio managers need to give this book a place on their shelf.

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Project and portfolio management in dynamic environments: Theory and evidence from the biopharmaceutical industry : (Dissertation)
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Citation Details
Title: Doctoral-level graduates in professional, technical, and scientific communication 1995-2000: A profile. (Applied Research).
Author: Kelli Cargile Cook
Publication: Technical Communication (Refereed)
Date: May 1, 2003
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From the supplier: Recent research indicates that the old employee qualifications no longer adequately meet the changing needs of industry. New and specific attributes now include passion for excellence, team work ability, multidisciplinary skills, and multicultural tolerance.

Citation Details
Title: A flexible technical communication education model for the Year 2000.(Symposium Part III)
Author: Marian G. Barchilon
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Citation Details
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Author: Karen Baranich
Publication: Technical Communication (Refereed)
Date: November 1, 2000
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Citation Details
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Author: Hary Bottka
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Citation Details
Title: Technical communication, engineering, and ABET's engineering criteria 2000: What lies ahead?. (Case History).
Author: Julia M. Williams
Publication: Technical Communication (Refereed)
Date: February 1, 2002
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Toward 2000: education, the society and the profession.: An article from: Technical Communication

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Toward 2000: education, the society and the profession.: An article from: Technical Communication
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Manufacturer: Society for Technical Communication
ProductGroup: Book
Binding: Digital

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From the supplier: A very brief historical background on technical communication is given. Then the content of the Journal of Society of Technical Communication is summarized, its focus given as the issues that confront technical communication education.

Citation Details
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Author: Kenneth T. Rainey
Publication: Technical Communication (Refereed)
Date: November 1, 1995
Publisher: Society for Technical Communication
Volume: v42 Issue: n4 Page: p543(2)

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