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Asset pricing (Cochrane)

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This textbook is the best introduction to the modern asset pricing theory as it is taught in the top PhD finance programs. It starts with the definition of the stochastic discount factor and the basic pricing equation P=E(MX) where P is the asset price, X is the asset payoff and M is the stochastic discount factor. The consumption-based model provides a natural formulation for M, it is simply proportional to the marginal rate of substitution for consumtion. With this basic model, the author applies it to standard issues in finance such as the equity premium puzzle, the random walk property of stock returns, contingent claims, factor pricing models (CAPM, APT) etc...In the second part of the book, he covers the empirical estimation of these models using the GMM method.  In Part III, he discusses option pricing and bonds with an introduction to the term structure of interest rates. In Part III, he presents a survey of recent emprirical works.
 

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