General Principles of Asset Pricing
In this entry, we discuss the general principles of asset pricing. Our focus here is to analyze asset pricing in a more general setup. Due to its generality, this entry is inevitably more abstract and challenging, but important for understanding the foundations of modern asset pricing theory. First, by extending the state-dependent contingent claims with two possible states allowing for an arbitrary number of states, we introduce the economic notions of complete market, the law of one price, and arbitrage. Then, we provide the fundamental theorem of asset pricing that ties these concepts to asset pricing relations. Subsequently, we discuss stochastic discount factor models, which is the unified ...
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