Recent Developments in Capital Market Theory: A Survey
Richard C. Stapleton
University of Strathclyde - Department of Accounting and Finance
Lancaster University Department of Accounting and Finance 98/006
This paper surveys some recent developments in the theory of capital markets. Particular emphasis is given to two strands of the literature. The first covers some recent and fundamental extensions to the theory of risk aversion and the demand for risky assets. Theses papers are concerned with the effect of non-hedgeable background risk on risk attitudes. The important implications for finance are for the size of the risk premium (the equity premium puzzle) and for the demand for and pricing of contingent claims. For example, background risk may help to explain the apparent over-pricing of options on equity indices.
The second topic is interest rate term structure models. Stochastic term structure models try to capture the possible future shapes of the term structure of interest rates. This is relevant for the pricing of contingent claims, in particular for the pricing of interest rate derivatives such as American-style swaptions. The paper will survey the most important recent models in the literature, each of which satisfies the fundamental no-arbitrage property. It will discuss the implications of the models for the pricing of both European-style and American-style options.
JEL Classification: E43, G11, G12, G13working papers series
Date posted: August 13, 1998
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.422 seconds