Title Page -- Copyright Page -- Dedication -- Acknowledgements -- Preface -- Contents -- Part I Introduction -- 1 The Economics of Financial Markets -- 1.1 The Economic Function of a Financial Market -- 1.2 The Intended Readers for This Book -- 1.3 Three Kinds of Trade-Offs -- 1.4 Mutually Beneficial Intertemporal Exchanges -- 1.5 Economic Efficiency and Mutually Beneficial Exchanges -- 1.6 Examples of Market Failures -- 1.7 Issues in Public Policy -- 1.8 The Plan of the Book -- Problems -- Notes -- 2 Financial Markets and Economic Efficiency -- 2.1 Financial Securities -- 2.2 Transaction Costs -- 2.3 Liquidity -- 2.4 The Problem of Asymmetric Information -- 2.5 The Problem of Agency -- 2.6 Financial Markets and Informational Efficiency -- Problems -- Notes -- Part II Intertemporal Allocation by Consumers and Firms When Future Payments Are Certain -- 3 The Fundamental Economics of Intertemporal Allocation -- 3.1 The Plan of the Chapter -- 3.2 A Primitive Economy with No Trading -- 3.3 A Primitive Economy with Trading, but with No Markets -- 3.4 The Assumption That Future Payments Are Known with Certainty Today -- 3.5 Abstracting from Firms -- 3.6 The Distinction between Income and Wealth -- 3.7 Income, Wealth, and Present Values -- Problems -- Notes -- 4 The Fisher Diagram for Optimal Intertemporal Allocation -- 4.1 The Intertemporal Budget Line -- 4.2 Intertemporal Indifference Curves -- 4.3 Allocating Wealth to Maximize Intertemporal Utility -- 4.4 Mutually Beneficial Exchanges -- 4.5 The Efficient Level of Investment -- 4.6 The Importance of Informational Efficiency in the Prices of Financial Securities -- Notes -- 5 Maximizing Lifetime Utility in a Firm with Many Shareholders -- 5.1 The Plan of the Chapter -- 5.2 A Firm with Many Shareholders -- 5.3 A Profitable Investment Project -- 5.4 Financing the New Project -- 5.5 Conclusion -- Problems.

Notes -- 6 A Transition to Models in Which Future Outcomes Are Uncertain -- 6.1 A Brief Review and the Plan of the Chapter -- 6.2 Risk and Risk Aversion -- 6.3 A Synopsis of Modern Portfolio Theory -- 6.4 A Model of a Firm Whose Future Earnings Are Uncertain: Two Adjacent Farms -- 6.5 Mutually Beneficial Exchanges: A Contractual Claim and a Residual Claim -- 6.6 The Equilibrium Prices of the Bond and the Stock -- 6.7 Conclusion -- Problems -- Notes -- Part III Rates of Return as Random Variables -- 7 Probabilistic Models -- 7.1 The Objectives of Using Probabilistic Models -- 7.2 Rates of Return and Prices -- 7.3 Rates of Return as Random Variables -- 7.4 Normal Probability Distributions -- 7.5 A Joint Probability Distribution for Two Discrete Random Variables 142 -- 7.6 A Summary Thus Far -- 7.7 The Effect of the Price of a Security on the Expected Value of Its Rate of Return -- 7.8 The Effect of the Price of a Security on the Standard Deviation of Its Rate of Return -- 7.9 A Linear Model of the Rate of Return -- 7.10 Regression Lines and Characteristic Lines -- 7.11 The Parameter ß as the Quantity of Risk in Security i -- 7.12 Correlation -- 7.13 Summary -- Problems -- Notes -- Part IV Portfolio Theory and Capital Asset Pricing Theory -- 8 Portfolio Theory -- 8.1 Introduction -- 8.2 Portfolios as Synthetic Securities -- 8.3 Portfolios Containing Two Risky Securities -- 8.4 The Trade-Off between the Expected Value and the Standard Deviation of the Rate of Return on a Portfolio That Contains Two Securities -- 8.5 A Simple Numerical Example to Show the Effect of ρAB on the Trade-Off between Expected Return and Standard Deviation -- 8.6 The Special Cases of Perfect Positive and Perfect Negative Correlation -- 8.7 Trade-Offs between Expected Return and Standard Deviation for Portfolios That Contain N Risky Securities -- 8.8 Summary -- Problems -- Notes.

9 The Capital Asset Pricing Model -- 9.1 Introduction -- 9.2 Capital Market Theory and Portfolio Theory -- 9.3 The Microeconomic Foundations of the CAPM -- 9.4 The Three Equations of the CAPM -- 9.5 A Summary of the Intuitive Introduction to the CAPM -- 9.6 The Derivation of the Capital Market Line -- 9.7 The Derivation of the Security Market Line -- 9.8 Interpreting ßi as the Marginal Effect of Security i on the Total Risk in the Investor's Portfolio -- 9.9 Summary -- Problem -- Notes -- 10 Multifactor Models for Pricing Securities -- 10.1 Introduction -- 10.2 Analogies and an Important Distinction between the Capital Asset Pricing Model and Multifactor Models -- 10.3 A Hypothetical Two-Factor Asset Pricing Model -- 10.4 The Three-Factor Model of Fama and French -- 10.5 The Five-Factor Model of Fama and French -- 10.6 The Arbitrage Pricing Theory -- 10.7 Summary -- Appendix: Estimating the Values of β and λ for a Two-Factor Model -- Problem -- Notes -- Part V The Informational and Allocative Efficiency of Financial Markets: The Concepts -- 11 The Efficient Markets Hypothesis -- 11.1 Introduction -- 11.2 Informational Efficiency, Rationality, and the Joint Hypothesis -- 11.3 A Simple Example of Informational Efficiency -- 11.4 A Second Example of Informational Efficiency: Predictability of Returns-Bubbles or Rational Variations of Expected Returns? -- 11.5 Informational Efficiency and the Predictability of Returns -- 11.6 Informational Efficiency and the Speed of Adjustment of Prices to Public Information -- 11.7 Informational Efficiency and the Speed of Adjustment of Prices to Private Information -- 11.8 Information Trading, Liquidity Trading, and the Cost of Capital for a Firm -- 11.9 Distinguishing among Equilibrium, Stability, and Volatility -- 11.10 Conclusion -- Appendix: The Effect of a Unit Tax in a Competitive Industry -- Notes.

12 Event Studies -- 12.1 Introduction -- 12.2 Risk-Adjusted Residuals and the Adjustment of Prices to New Information -- 12.3 The Structure of an Event Study -- 12.4 Examples of Event Studies -- 12.5 Example 1: The Effect of Antitrust Action against Microsoft -- 12.6 Example 2: Regulatory Rents in the Motor Carrier Industry -- 12.7 Example 3: Merger Announcements and Insider Trading -- 12.8 Example 4: Sudden Changes in Australian Native Property Rights 305 -- 12.9 Example 5: Gradual Incorporation of Information about Proposed Reforms of Health Care into the Prices of Pharmaceutical Stocks -- 12.10 Conclusion -- Notes -- Part VI The Informational and Allocative Efficiency of Financial Markets: Applications -- 13 Capital Structure -- 13.1 Introduction -- 13.2 What Is Capital Structure? -- 13.3 The Economic Significance of a Firm's Capital Structure -- 13.4 Capital Structure and Mutually Beneficial Exchanges between Investors Who Differ in Their Tolerances for Risk -- 13.5 A Problem of Agency: Enforcing Payouts of Free Cash Flows -- 13.6 A Problem of Agency: Reallocating Resources When Consumers' Preferences Change -- 13.7 A Problem of Agency: Asset Substitution -- 13.8 Economic Inefficiencies Created by Asymmetric Information -- 13.9 The Effect of Capital Structure on the Equilibrium Values of Price and Quantity in a Duopoly -- 13.10 The Effect of Capital Structure on the Firm's Reputation for the Quality of a Durable Product -- 13.11 Conclusion -- Appendix -- Problems -- Notes -- 14 Insider Trading -- 14.1 Introduction -- 14.2 The Definition of Insider Trading -- 14.3 Who Owns Inside Information? -- 14.4 The Economic Effect of Insider Trading: A General Treatment -- 14.5 The Effect of Insider Trading on Mitigating Problems of Agency -- 14.6 The Effect of Insider Trading on Protecting the Value of a Firm's Confidential Information.

14.7 The Effect of Insider Trading on the Firm's Cost of Capital through the Effect on Liquidity -- 14.8 The Effect of Insider Trading on the Trade-Off between Insiders and Informed Investors in Producing Informative Prices -- 14.9 Implications for the Regulation of Insider Trading -- 14.10 Summary -- Notes -- 15 Options -- 15.1 Introduction -- 15.2 Call Options -- 15.3 Put Options -- 15.4 A Simple Model of the Equilibrium Price of a Call Option -- 15.5 The Black-Scholes Option Pricing Formula -- 15.6 The Put-Call Parity -- 15.7 Homemade Options -- 15.8 Introduction to Implicit Options -- 15.9 Implicit Options in a Leveraged Firm -- 15.10 An Implicit Option on a Postponable and Irreversible Investment Project -- 15.11 Summary -- Appendix: Continuous Compounding -- Problems -- Notes -- 16 Futures Contracts -- 16.1 Introduction -- 16.2 Futures Contracts as Financial Securities -- 16.3 Futures Contracts and the Efficient Allocation of Risk -- 16.4 The Futures Price, the Spot Price, and the Future Price -- 16.5 The Long Side and the Short Side of a Futures Contract -- 16.6 Futures Contracts as Financial Securities -- 16.7 Futures Contracts as Transmitters of Information about the Future Values of Spot Prices -- 16.8 Investment, Speculation, and Hedging -- 16.9 Futures Prices as Predictors of Future Values of Spot Prices -- 16.10 Conclusion -- Notes -- 17 Additional Topics in the Economics of Financial Markets -- 17.1 Bonds -- 17.2 Initial Public Offerings -- 17.3 Mutual Funds -- 17.4 Behavioral Finance -- 17.5 Market Microstructure -- 17.6 Financial Derivatives -- 17.7 Corporate Takeovers -- 17.8 Signaling with Dividends -- 17.9 Bibliographies -- Note -- 18 Summary and Conclusion -- 18.1 An Overview -- 18.2 Efficiency -- 18.3 Asset Pricing Models -- 18.4 Market Imperfections -- 18.5 Derivatives -- 18.6 Implications for Public Policy -- 18.7 A Final Word.

Notes.