Neoclassical Finance

Stephen A. Ross is the Franco Modigliani Professor of Finance and Economics at the Massachusetts Institute of Technology. Best known as the originator of arbitrage pricing theory and as the codiscoverer of risk-neutral pricing and the binomial model for pricing derivatives, he is the coauthor of the best-selling textbook series in finance, Corporate Finance.

"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