Neoclassical Finance (Princeton Lectures in Finance) [Hardcover]

Stephen A. Ross (Author)

Book Description

ISBN-10: 0691121389 | ISBN-13: 978-0691121383 | Publication Date: October 11, 2004

Neoclassical Finance provides a concise and powerful account of the underlying principles of modern finance, drawing on a generation of theoretical and empirical advances in the field. Stephen Ross developed the no arbitrage principle, tying asset pricing to the simple proposition that there are no free lunches in financial markets, and jointly with John Cox he developed the related concept of risk-neutral pricing. In this book Ross makes a strong case that these concepts are the fundamental pillars of modern finance and, in particular, of market efficiency. In an efficient market prices reflect the information possessed by the market and, as a consequence, trading schemes using commonly available information to beat the market are doomed to fail.

By stark contrast, the currently popular stance offered by behavioral finance, fueled by a number of apparent anomalies in the financial markets, regards market prices as subject to the psychological whims of investors. But without any appeal to psychology, Ross shows that neoclassical theory provides a simple and rich explanation that resolves many of the anomalies on which behavioral finance has been fixated.

Based on the inaugural Princeton Lectures in Finance, sponsored by the Bendheim Center for Finance of Princeton University, this elegant book represents a major contribution to the ongoing debate on market efficiency, and serves as a useful primer on the fundamentals of finance for both scholars and practitioners.

Editorial Reviews

Review

"This book is a vigorous defense of ECMH, on grounds that ought to interest hedge fund investors". -- Christopher Faille, Hedge World/Inside Edge

From the Inside Flap

"Stephen Ross, a pioneer of the field, surveys and integrates modern finance in this lovely book. Much of the analysis is strikingly novel. For example, Ross emphasizes how mild limits on risk aversion can extend no-arbitrage arguments to say a lot about asset prices; he derives discount factor bounds in a unified way from the principle that more choices make you happier; he presents the 'random walk' result in a compelling dynamic-trading environment; and he closes with a careful dynamic contingent-claims analysis of the closed-end fund discount. This chapter exemplifies the neoclassical philosophy that patient, scientific study can eventually solve the hardest empirical puzzles."--John Cochrane, University of Chicago Graduate School of Business, author of Asset Pricing

"Neoclassical Finance is a must-read--a masterly development of neoclassical asset pricing theory by one of its most original thinkers. Stephen Ross not only provides a rigorous yet intuitive synthesis of pricing fundamentals, but also shows how these fundamentals offer a powerful alternative to many of the claims of behavioral finance."--Hayne E. Leland, Arno Rayner Professor of Finance and Management, University of California, Berkeley

"This delightful volume of four edited lectures by Stephen Ross tells us about both his views and his tastes. The first chapter deals with no-arbitrage methods--as we might expect--and the remaining three with more contentious topics: bounds on the pricing kernel, market efficiency, and behavioural finance. As we have come to expect from Stephen Ross, the exposition is excellent and the range masterly. We also learn, from the choices that have been made in order to fit this material into a small space, what he thinks is important. This is an outstanding volume that will be read with profit and enjoyment both by Professor Ross's colleagues in the profession and by those outside finance seeking an introduction to these important and controversial questions."--Stephen M. Shaefer, Professor of Finance, London Business School

"Neoclassical Finance is a significant contribution to the field that deserves to be widely cited. Stephen Ross provides a clear and concise discussion of basic theory, a new and in some ways unique look at arbitrage and market efficiency, and resolves a long-standing empirical puzzle about closed-end funds."--Richard Roll, Japan Alumni Chair in Finance, Anderson School of Business, University of California, Los Angeles

"The battle between classical and behavioral economics is here to stay and will be a centerpiece of debate in the years to come, especially in the portfolio management arena. Stephen Ross contends that critics of neoclassical finance are all too willing to live with the proverbial $100 bill sitting unclaimed on the pavement, and underestimate the power of arbitrage. He does a marvelous job of establishing the basic foundations of neoclassical finance, and describing its tenets and results. And he does so with just the right mix of survey materials and new results."--Yacine Aït-Sahalia, Director, Bendheim Center for Finance, Princeton University

See all Editorial Reviews

Product Details

• Hardcover: 120 pages
• Publisher: Princeton University Press (October 11, 2004)
• Language: English
• ISBN-10: 0691121389
• ISBN-13: 978-0691121383
• Product Dimensions: 9.3 x 6.1 x 0.8 inches
• Shipping Weight: 11.4 ounces (View shipping rates and policies)
• Average Customer Review: 3.0 out of 5 stars  See all reviews (2 customer reviews)
• Amazon Best Sellers Rank: #1,055,192 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

9 of 18 people found the following review helpful:

5.0 out of 5 stars Excellent riposte to the behavioralists, November 19, 2004

By 

Jamesian "pragma" (Connecticut USA) - See all my reviews

This review is from: Neoclassical Finance (Princeton Lectures in Finance) (Hardcover)

Why is the market capitalization of an exchange-traded fund so often less than the same fund's net asset value? Isn't this proof that markets aren't rational or efficient? that a more psychological (or "behavioral," in the fashionable term) approach to understanding finance makes more sense that the efficient capital markets hypothesis and its offshoots?

Ross was instrumental in the creation of the ECMH in its current form in the mid 1970s, with his development of the no-arbitrage theory of asset pricing and his formulation, with John Cox, of the idea of risk-neutral pricing. He comes to the defense of that structure of ideas against the behaviorists, and against their use of the valuation issued of closed-end funds in particular as a "poster child."

There aren't many laugh-out-loud moments in books on these subjects, but I for one laughed when I reached a footnote on page 70, which describes one aspect of this controversy as "an interesting example for scientific sociology." I won't explain further, that would be unfair.

12 of 36 people found the following review helpful:

1.0 out of 5 stars What!?, January 4, 2006

By 

Professor Joseph L. McCauley "Joseph L. McCauley" (Austria+Texas) - See all my reviews

This review is from: Neoclassical Finance (Princeton Lectures in Finance) (Hardcover)

"Neo-classical finance" is an impossibility. Money/liquidity cannot be built into neo-classical economic theory. Radner noted this over thirty years ago. He speculated that money/liquidity arises from uncertainty and/or from computational limitations (correctly stated, from lack of computability of neo-classical equilbria, which Lewis later studied). Why would anyone with empirical background write a book that has no application whatsoever to empirical data: the neo-classical model has been completely falsified, it does not describe any real market, much less financial markets. As I have explained in writings and in economics colloquia and conferences, neo-classical economics is not science, neo-classical economics is mathematized ideology.