Chapter 9

Chapter 9 introduces a second theory of asset pricing: Arrow-Debreu security pricing. It is a very general equilibrium theory, and dispenses with many of the assumptions underlying the CAPM. The notion of risk sharing between economic agents is introduced. The ability of competitive financial markets to create the optimal set of tradable securities is also considered.

Arbitrage Pricing Theory; Pareto optimal; Arrow–Debreu pricing theory; risk sharing; competitive equilibrium; risk-neutral probability; Arrow-Debreu security; state claim; stochastic discount factor (SDF)

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