This book examines non-Gaussian distributions. It addresses the causes and consequences of non-normality and time dependency in both asset returns and option prices. The book is written for non-mathematicians who want to model financial market prices so the emphasis throughout is on practice. There are abundant empirical illustrations of the models and techniques described, many of which could be equally applied to other financial time series.

Practitioners and researchers who have handled financial market data know that asset returns do not behave according to the bell-shaped curve, associated with the Gaussian or normal distribution. Indeed, the use of Gaussian models when the asset return distributions are not normal could lead to a wrong choice of portfolio, the underestimation of extreme losses or mispriced derivative products. Consequently, non-Gaussian models and models based on processes with jumps, are gaining popularity among financial market practitioners.

Non-Gaussian distributions are the key theme of this book which addresses the causes and consequences of non-normality and time dependency in both asset returns and option prices. One of the main aims is to bridge the gap between the theoretical developments and the practical implementations of what many users and researchers perceive as "sophisticated" models or black boxes. The book is written for non-mathematicians who want to model financial market prices so the emphasis throughout is on practice. There are abundant empirical illustrations of the models and techniques described, many of which could be equally applied to other financial time series, such as exchange and interest rates.

The authors have taken care to make the material accessible to anyone with a basic knowledge of statistics, calculus and probability, while at the same time preserving the mathematical rigor and complexity of the original models.

This book will be an essential reference for practitioners in the finance industry, especially those responsible for managing portfolios and monitoring financial risk, but it will also be useful for mathematicians who want to knowmore about how their mathematical tools are applied in finance, and as a text for advanced courses in empirical finance; financial econometrics and financial derivatives.

For PhD finance courses in business schools, there is equal emphasis placed on mathematical rigour as well as economic reasoning. Advanced Finance Theories provides modern treatments to five key areas of finance theories in Merton's collection of continuous time work, viz. portfolio selection and capital market theory, optimum consumption and intertemporal portfolio selection, option pricing theory, contingent claim analysis of corporate finance, intertemporal CAPM, and complete market general equilibrium. Where appropriate, lectures notes are supplemented by other classical text such as Ingersoll (1987) and materials on stochastic calculus.

Relying on the existence, in a complete market, of a pricing kernel, this book covers the pricing of assets, derivatives, and bonds in a discrete time, complete markets framework. It is primarily aimed at advanced Masters and PhD students in finance. - Covers asset pricing in a single period model, deriving a simple complete market pricing model and using Stein's lemma to derive a version of the Capital Asset Pricing Model. - Looks more deeply into some of the utility determinants of the pricing kernel, investigating in particular the effect of non-marketable background risks on the shape of the pricing kernel. - Derives the prices of European-style contingent claims, in particular call options, in a one-period model; derives the Black-Scholes model assuming a lognormal distribution for the asset and a pricing kernel with constant elasticity, and emphasizes the idea of a risk-neutral valuation relationship between the price of a contingent claim on an asset and the underlying asset price. - Extends the analysis to contingent claims on assets with non-lognormal distributions and considers the pricing of claims when risk-neutral valuation relationships do not exist. - Expands the treatment of asset pricing to a multi-period economy, deriving prices in a rational expectations equilibrium. - Uses the rational expectations framework to analyse the pricing of forward and futures contracts on assets and derivatives. - Analyses the pricing of bonds given stochastic interest rates, and then uses this methodology to model the drift of forward rates, and as a special case the drift of the forward London Interbank Offer Rate in the LIBOR Market Model.