fin10 - Financial Markets Econ 333 Spring 08 1 Financial...

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Econ 333 Spring 08 1 Financial Markets
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Econ 333 Spring 08 2 Financial Markets Having considered the general principles of asset pricing, we now apply these to three key financial markets: The stock market, the bond market, and the foreign exchange (FOREX) market. Each market has specific features that need to be taken into account which make the analysis very different. Their common feature is that they all satisfy the general equilibrium pricing equation: And hence the no-arbitrage condition is the coefficient of relative risk aversion and is the stochastic discount factor or marginal rate of substitution. 1 ] ) 1 [( 1 1 , = + + + t t i t M r E ) , cov( ) 1 ( 1 , 1 1 , f t i t t f t f t i t r r c c r r r E + = + + + βσ t σ ) ( ' ) ( ' 1 1 t t C U C U t M + = + β
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