Wipplinger, Evert

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Financ Mark Portf Manag (2009) 23: 329–330DOI 10.1007/s11408-009-0110-5B O O K R E V I E WC. Skiadas: Asset Pricing TheoryPrinceton University Press, 2009Evert WipplingerPublished online: 17 July 2009© Swiss Society for Financial Market Research 2009Asset Pricing Theory by Costis Skiadas is a self-contained mathematical treatmentof the foundations of discrete asset pricing. The book is unique in this field in that itfamiliarizes the reader not only with the core principles of theoretical asset pricingbut also with a formal mathematical approach. Its exposition features the definition-proposition-proof structure common to mathematical texts, and it is arguably the mostrigorous textbook on the subject, on par with research articles. All assumptions anddefinitions are made explicit, which reveals that the author’s intended audience com-prises engineers or mathematicians who want exposure to asset pricing and financeacademics requiring a detailed treatment even in an introductory book.Asset Pricing Theory is structured into three main parts. The first part treats singleperiod cash flows in four chapters. Chapter 1 introduces basic definitions of financialmarkets and Arrow-Debreu securities along with the fundamental theorems of assetpricing. Chapter 2 focuses on mean variance analysis. In Chapter 3, the author intro-duces equilibrium pricing in the context of representative agents and utility functions.Chapter 4 concludes the first part with a focus on expected utility.The second part of the book extends the results of the first part to a multi-periodsetting. The author’s approach is presented, which allows the reader to find analo-gies to continuous time asset prices. Chapter 5 provides a dynamic arbitrage pricingframework by extending Chapter 1. In the last chapter Skiadas presents basic proper-ties of optimal consumption, chiefly in the setting of Kreps-Porteus utility.A large part of the book is devoted to mathematical appendices, the third part of thebook, which make it self-contained. The author suggests reading the first appendix onlinear algebra concurrently with Part I of the text and the second appendix on discreteprobability theory with Part II. It is especially important to read the second appendixE. Wipplinger ()University of St. Gallen, Rosenbergstr. 52, 9000 St. Gallen, Switzerlande-mail: evert.wipplinger@unisg.ch330 E. Wipplingeralong with, or preferably before, reading Part II as it includes notational definitions.The mathematical foundations covered in this book are, of course, also covered instandard textbooks, but this book provides added value by combining and linking themathematical background to theoretical asset pricing. Each chapter includes a briefliterature review pointing the reader to the research articles that underlie the resultspresented. Moreover, the book includes exercises at the end of each chapter, mainlyconsisting of additional proofs.The overall scope of the book is narrower than that of some other textbooks in thefield, such as Dynamic Asset Pricing Theory by Darrell Duffie (Princeton UniversityPress, 2001) or Theory of Asset Pricing by George Pennacchi (Pearson Education,2008), but larger than that of others, for example, LeRoy and Werner’s Principlesof Financial Economics (Cambridge University Press, 2000). The results in the bookare largely left undiscussed, meaning that the reader needs to either consult one of thebooks mentioned above, or an accompanying lecture, for matters such as economicimplications and applied models. However, this design is justified by the book’s pur-pose of providing a rigorous treatment of the basics of discrete asset pricing. Eventhough the book takes a formal stance, its concise style makes it accessible to onewilling to work through it. I, personally, enjoyed the book’s style.Costis Skiadas has successfully created a truly self-contained reference on thefoundations of asset pricing theory. I recommend it to those interested in a thoroughintroduction to this subject that proceeds from the bottom up.

C. Skiadas: Asset Pricing Theory: Princeton University Press, 2009

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C. Skiadas: Asset Pricing Theory: Princeton University Press, 2009

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