Economics and Finance

This book presents an introduction to arbitrage theory and its applications to problems for financial derivatives. This second edition includes more advanced materials; appendices on measure theory, probability theory, and martingale theory; and a new chapter on the martingale approach to arbitrage theory. The chapters cover the binomial model, a general one period model, stochastic integrals, differential equations, portfolio dynamics, arbitrage pricing, completeness and hedging, parity relations and delta hedging, the martingale approach, incomplete markets, dividends, currency derivatives, barrier options, stochastic optimal control, bonds and interest rates, short rate models, forward rate models, and LIBOR and swap market models.

This book gives a comprehensive introduction to arbitrage theory for the pricing of contingent claims, such as options, futures, and other financial derivatives. The arbitrage theory for the term structure of interest rates is given particular consideration. Also included is a self‐contained exposition of stochastic optimal control, with applications to portfolio optimisation. The mathematical development is precise but avoids the explicit use of measure theory.

The year 2008 marks Amartya Sen's 75th birthday. Amartya has made deep and lasting contributions to the academic disciplines of economics, philosophy, and more broadly the social sciences. He has engaged in policy dialogue and public debate, advancing the cause of a human development focused policy agenda, and a tolerant and democratic polity. This argumentative Indian has made the case for the poorest of the poor, and for plurality in cultural perspective. It is not surprising that he has won the highest awards, ranging from the Nobel Prize in Economics to the Bharat Ratna, India's highest civilian honor. This public recognition has gone hand in hand with the affection and admiration that Amartya's colleagues and students hold for him. This is the first book in a two-volume Festschrift for Amartya Sen. The chapters, from across a range of social science disciplines, are written by some of the world's leading thinkers. This first book covers the topics of ethics, normative economics, and welfare; agency, aggregation, and social choice; poverty, capabilities, and measurement; and identity, collective action, and public economics. It is a fitting tribute to Sen's own contributions to the discourse on ethics, welfare and measurement.

The year 2008 marks Amartya Sen's 75th birthday. Amartya has made deep and lasting contributions to the academic disciplines of economics, philosophy, and the social sciences more broadly. He has engaged in policy dialogue and public debate, advancing the cause of a human development focused policy agenda, and a tolerant and democratic polity. This argumentative Indian has made the case for the poorest of the poor, and for plurality in cultural perspective. It is not surprising that he has won the highest awards, ranging from the Nobel Prize in Economics to the Bharat Ratna, India's highest civilian honor. This public recognition has gone hand in hand with the affection and admiration that Amartya's colleagues and students hold for him. This is the second book in a two-volume Festschrift for Amartya Sen. The chapters, from across a range of social science disciplines, are written by some of the world's leading thinkers. This second book covers the topics of human development and capabilities; gender and household; growth, poverty, and policy; and society, politics, and history. It is a fitting tribute to Sen's own contributions to the discourse on society, institutions and development.

This book is about fundamental economic theory, but it maintains that economics is meaningless outside the framework of history.

It therefore analyses the evolution of some leading economies since the Industrial Revolution.

It opens with a critical discussion of some earlier attempts to expound a theory of history, notably, the so‐called ‘new economic history’ or ‘cliometrics’ and then the ideas of two outstanding social scientists—Kondratiev and Schumpeter.

They were both concerned with major qualitative as well as quantitative changes in evolving economic systems, with the explanation of such revolutionary transformations and with their periodization.

Our book too is concerned with exploring these problems, but it offers deep criticism both of Kondratiev's ‘long wave’ theory and of Schumpeter's attempt to reconcile this theory with the equilibrium models of Walras.

Like Keynes, we emphasize some of the limitations of purely econometric models and insist on the great importance of ‘semi‐autonomous’ institutions and subsystems of society, which influence the economy and are influenced by it in a process of mutual interaction and adjustment.

Although in recent times the technology subsystem has been extremely dynamic and influential in the evolution of the economy, it is essential to consider also the political, cultural, and science subsystems, all of which have a vital role in achieving that degree of congruence in the social system necessary for successful economic growth.

This approach is illustrated in those chapters of the book that are devoted to a historical account of five successive technological revolutions, i.e. water‐powered mechanization, steam‐powered mechanization, electrification, motorization, and computerization.

Statistical evidence of the great significance of these technological revolutions for structural change in the economy is found in the changing composition of the leading cohort of the hundred largest firms.

Evidence of the social conflicts and tensions engendered by each structural crisis of adjustment is found in the statistics of days lost in strikes, as well as in political conflicts over the regulatory regime and in international markets.

South Korea has been quietly growing into a major economic force that is even challenging some Japanese industries. This book examines South Korean economic growth as an example of “late industrialization,” a process in which a nation's industries learn from earlier innovator nations rather than innovate themselves. Discussing state intervention, shop‐floor management, and big business groups, the reasons are explored for South Korea's phenomenal growth, paying special attention to the principle of reciprocity in which the government imposes strict performance standards on those industries and companies that it aids. It is shown thereby how South Korea, Japan, and Taiwan were able to grow faster than other emerging nations such as Brazil, Turkey, India, and Mexico. The book is arranged in three main parts: Part 1 surveys South Korean history and the origins of state policies that led to the successes of its late industrialization; Part 2 examines the ways in which the South Korean management and workforce were transformed into major factors in the growth of its industry; and Part 3 discusses the creation of comparative advantage in several industries and the reasons why only one kept pace with expansion while the others drove it.

Relying on the existence, in a complete market, of a pricing kernel, this book covers the pricing of assets, derivatives, and bonds in a discrete time, complete markets framework. It is primarily aimed at advanced Masters and PhD students in finance. Topics covered include CAPM, non-marketable background risks, European-style contingent claims as in Black–Scholes and in cases where risk-neutral valuation relationship does not exist, multi-period asset pricing under rational expectations, forward and futures contracts on assets and derivatives, and bond pricing under stochastic interest rates. All the proofs, including a discrete time proof of the Libor market model, are shown explicitly.

Asset prices are driven by public news and information that is dispersed among many market participants. Traditional asset pricing theories have assumed that all investors hold symmetric information. Research in the past two decades has shown that the inclusion of asymmetric information drastically alters traditional results. This book provides a detailed up‐to‐date survey that serves as a map for students and other researchers navigating through this literature.

The book starts by introducing the reader to different knowledge, equilibrium, and efficiency concepts. After explaining no‐trade theorems, it highlights the important role of asymmetric information in explaining the existence and anatomy of bubbles. The subsequent overview of market microstructure models shows how information is reflected in prices and how traders can infer it from prices. Insights derived from herding models are used to provide explanations for stock market crashes. If investors have short horizons, price correcting arbitrage activity is limited and investors have a tendency to focus on the same (possible unimportant) news, a phenomena that led Keynes to compare the stock market with a beauty contest. The book concludes with a brief summary of bank runs and their connection to financial crises.

In summary, models with asymmetric information provide a better understanding of bubbles, crashes, and other market inefficiencies and frictions.

This book tells the story of an academic department that underwent rapid, wrenching changes at a time and in a place that one would not have expected them to have occurred. The time was the late 1960s through the 1970s and the place was a US public university heavily dependent on state funding. The Cold War was raging, the US public was fearful of communism and the Soviet Union, and politicians were speaking to these fears for political ends. And the Economics Department at the University of Massachusetts at Amherst was in turmoil. In this environment a significant proportion of that department's visible faculty of traditional economists was rapidly created and, in spite of the anti-Marxist political climate and the dependence of the University on state politicians for funding, quickly replaced by a significant visible group of Marxian economists. The story told covers the particulars of the background for these events relating to the University of Massachusetts, the political activism of the period, and the state of the economics profession. It describes the events themselves in considerable detail, the multi-year turmoil within the Economics Department associated with them, the eventual resolution of that turmoil into an intellectually exciting and friendly atmosphere, the significance of the events in terms of academic endeavor, and their legacy for the economics profession.

Banks and financial institutions are faced with two apparently conflicting phenomena — interest rate deregulation on the one hand and capital adequacy requirements and prudential norms on the other. In such a situation, these institutions need to work out a strategic framework which must evolve around the profit objective so as to build up quality loan-assets portfolios and to ensure adequate capital growth. This book provides a comprehensive analysis of lending strategies, credit appraisal, risk analysis, and lending decisions within the overall objectives of a lending organization. This revised edition takes into account recent global developments in the banking sector as well as changes in the notion of banking. It includes three new chapters in which the author discusses topical issues such as the impact of capital regulation on the risk attitude and profitability of banks, strategies to protect banks from a liquidity crisis, and the need of a portfolio approach in developing models for credit exposure and loan management within a risk–return framework.