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What are some asset pricing textbooks that give a solid introduction into the field?

I suggest one textbook per answer with a list of its pros and cons.

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  • $\begingroup$ My personal interest is in getting a solid first-time introduction into the field by independent study of a single textbook, hopefully without too complicated math but with good intuition. I am considering Cochrane "Asset Pricing" (2005) (looks like a classic), Ingersoll "Theory of Financial Decision Making" (1987) (looks mathy and a little outdated, but people say it has great intuition), Campbell " Financial Decisions and Markets" (2017) (sounds promising and is up to date) and Duffie "Dynamic Asset Pricing Theory" (3rd ed, 2001) (looks awfully mathy). Anything missing from my list? $\endgroup$
    – Richard Hardy
    Jun 8, 2020 at 7:37
  • $\begingroup$ However, I am not specifying this in the body so that the question remains of general interest. $\endgroup$
    – Richard Hardy
    Jun 8, 2020 at 7:37
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    $\begingroup$ Cochrane is certainly classic, but slightly dated perhaps. He’s strong on GMM. Duffie is indeed quite theoretical (I liked it though). Campbell (2017) and Back (2017) are more up to date and easier to digest. I enjoyed reading Munk’s (2013) financial asset pricing theory, it’s well written. All these books are typically recommended for a first year PhD course on asset pricing. Bali et al. (2016) wrote a fantastic book surveying empirical asset pricing (perhaps not relevant to you). $\endgroup$
    – Kevin
    Jun 8, 2020 at 8:33
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    $\begingroup$ Duffie: Dynamic Asset Pricing Theory, Campbell: Financial Decisions and Markets: A Course in Asset Pricing.; Back: Asset Pricing and Portfolio Choice, Munk: Finacial Asset PRicing Theory, Bali/Engle: Empirical Asset Pricing: The Cross Section of Stock Returns $\endgroup$
    – nbbo2
    Jun 8, 2020 at 9:25
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    $\begingroup$ Regarding a close vote for the question seemingly being opinion based: the question does not try to organize a competition but rather provide the users with a list of established texts in the field so that a newcomer could benefit from going directly to the best texts that are available rather than spending extensive time collecting this information for oneself. Such questions are widespread in other SE sites (e.g. there are multiple textbook requests on Cross Validated) and do not get closed as opinion based. Some of them become Community Wiki, though. $\endgroup$
    – Richard Hardy
    Jun 10, 2020 at 8:00

3 Answers 3

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I discuss the books I mentioned in the comments. They all deal with standard (theoretical) asset pricing (starting with one period utility maximisation and then branch off). Other books like Björk, Shreve or Jarrow focus more on time continuous models and/or derivatives pricing and I do not discuss them here. They use more advanced maths.

Cochrane (2005): Asset Pricing

  • The most beautiful part of his book is how everything is framed using a SDF and the Euler equation $\mathbb{E}_t[R_{t+1}M_{t+1}]=1$.
  • Cochrane is arguably one of the best writers in finance, so it's great to read his work!
  • Cochrane only deals with simple/standard asset pricing: SDF, risk-neutral pricing, factors and beta representation, mean variance and a bit on options and bonds; the rest of the book is about GMM, testing asset pricing models and empirical results. The book does not cover ``advanced'' asset pricing theories.
  • Because Cochrane combines empirical insights, tests with theory, the book is a great start and remains on the recommended reading list of most PhD asset pricing classes.
  • You find much information on John Cochrane's homepage, including YouTube videos summarising large parts of the book.

Duffie (2001): Dynamic Asset Pricing Theory

  • Is more theoretical (mathematical) than Cochrane.
  • Deals appropriately with continuous time models and derivatives pricing (including some stochastic calculus and numerical methods).
  • Reads at times a bit like financial economics emphasising equilibria etc. (I'm not saying that's bad at all!)
  • Spends less time talking about the results (intuition) but is more rigorous
  • Lacks, just like Cochrane, more advanced/newer models.

Munk (2013): Financial Asset Pricing Theory

  • Discusses standard material (utility, arbitrage, state price deflator, the SDF here) and then covers a lot about consumption-based asset pricing models (simple CRRA log-normal consumption giving rise to the equity premium puzzle up to recursive utility and long run risk models (which resolve that puzzle again)).
  • Is however lacking any production-based asset pricing and does not cover options a lot (but covers the term structure).
  • Uses more maths, but starts with a simple review of stochastic calculus and is great at explaining what the equations mean.

Campbell (2017): Financial Decisions and Markets: A Course in Asset Pricing

  • As always, starts with a detailed overview about utility, static pricing, CAPM and SDF.
  • Covers most of the consumption side (from CRRA to long run risk, ambiguity aversion, Epstein-Zin, disaster risk,...) but also covers production-based asset pricing and a lot about heterogenous investors (the entire third part of the book!)
  • This is actually a short book (400 odd pages).
  • The author himself best summarises the book.

Back (2017): Asset Pricing and Portfolio Choice

  • Begins with a detailed discussion of one-period models but then covers time-continuous models and option pricing.
  • Covers more advanced topics ($q$-theory, heterogenous beliefs and different preferences (ambiguity aversion for example).
  • Does not cover how to empirically test asset pricing models (but refers to empirical findings: has an entire section about different models explaining the equity premium (recursive utility from EZ, Long run risk, external habits, rare disasters,...).

Bali, Engle, Murray (2016): Empirical Asset Pricing: The Cross Section of Stock Returns

  • Perhaps not related to what you're looking for but empirical asset pricing is equally important as theory.
  • Starts with some basic techniques (correlation, portfolio sorts, FM regressions) and then discusses various anomalies.
  • Explains how to reproduce the tables using CRSP/Compustat/OptionMetrics...
  • Only focuses on stock returns (as indicated the title!), so nothing on bonds, options or the equity premium.
  • The Econometrics of Financial Markets (Campbell, Lo, MacKinley) is an earlier book on empirical asset pricing, Empirical Asset Pricing from Ferson (2019) is a more modern approach which begins with SDF theory (``$m$-talk'') and then discusses a lot econometrics, tests, GMM etc. He also provides an overview about theories.

Master Level Books

The books mentioned above are used for PhD classes in asset pricing. Thus, they assume implicitly some basic understanding of stocks, bonds, funds and options, how markets work, etc. While these books carefully derive risk and return relationships, it's probably useful to have seen the models in simplified versions before reading the books (just like it's nice to know $\mathbb{R}^n$ before a general topological space). Hence, here are some examples of MSc level textbooks:

To be frank, there's probably not too much difference between the books (I hope the authors aren't reading this). I'd probably go with Bodie et al.'s book or Mazzoni's (his first chapters are a nice overview about financial economics). Linton's book echoes the idea of emphasising empirical work in asset pricing. They are all very light reads and introduce Markowitz, CAPM, APT, EMH, etc. They are nice as an introduction to finance for MSc students but if you're interested in reading papers and academic research, I'd quickly grab one of the proper PhD books mentioned above.

Summary

So, to sum up, you should of course read all these books! :D But seriously, Cochrane is just great to read because of his writing style and how he combines theory and empirics. Duffie is more technical. Munk is a great compromise between the two. If you want to know more about newer models, Campbell and Back would be more useful. If you want to be updated on what we know empirically about the cross-section of stock returns, Bali et al. (2016) is a must-read.

There obviously exist many older books, Ingersoll (1987), Huang and Litzenberger (1988), Merton (1992), etc. But they had all been published before I was born and I haven't read them.

You can, of course, also find great material online. If you just google for lecture notes on the topic, you find many great summaries of asset pricing (also some poor ones). This one is actually forthcoming as a book and looks very promising.

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    $\begingroup$ I am relieved to see my bounty will not be wasted. Though there is no guarantee an even better answer will not be posted, yours is already a great one. $\endgroup$
    – Richard Hardy
    Jun 24, 2020 at 12:55
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    $\begingroup$ I think will start from Cochrane, then follow it up with Campbell. I hope there will be quite some overlap, so Campbell will not require nearly as much effort as Cochrane. I have not had the time to read any of these yet. $\endgroup$
    – Richard Hardy
    Jul 22, 2020 at 18:38
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    $\begingroup$ Cochrane did a MOOC on Coursera on Asset Pricing using this book. I can not quickly find the videos but they must be somewhere. $\endgroup$
    – Bob Jansen ♦
    Feb 17, 2021 at 12:52
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    $\begingroup$ You can find links to videos about the book on Cochrane's homepage (alongside many other useful notes). These videos are also stellar (just like the book) and helped me a lot when I started my PhD. I included the link in the answer, thanks for pointing that out, @BobJansen $\endgroup$
    – Kevin
    Feb 17, 2021 at 12:55
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    $\begingroup$ @BobJansen, after having watched the first 30 minutes of Cochrane's videos I feel I might have to take my words back. He is pretty entertaining! :) $\endgroup$
    – Richard Hardy
    Feb 19, 2021 at 18:18
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I would recommend Cochrane as well.

Pros

  • Deals with both theoretical and empirical asset pricing.
  • Nice mix of intuition and math.
  • Cochrane has videos from his class on Asset Pricing on Youtube, so if you get stuck on a subject you can use a video to gain some quick intuition.
  • Great treatment of the differences between cross sectional and time series regressions to test asset pricing models, as well as of GMM and how to use it to derive test statistics/errors.

Cons

  • Not as rigorous, especially on the theoretical side, as other books.

I would suggest pairing it with some book that is theoretically oriented. I've personally read Munk: Financial Asset Pricing Theory and would definitely recommend it for a treatment of theory. I've also read parts of Pennachi: Theory of Asset Pricing, but found it harder to follow.

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I suggest you take a look at this topic:

What are the quantitative finance books that we should all have in our shelves?

Other than that I strongly recomment Campbell's book mentioned above. Perfect for a 1st year PhD introduction into asset pricing.

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  • $\begingroup$ Thank you! I am aware of the tread, and I have found it relevant and useful (both the question and the answers). Regarding this answer, I think it suits a little better as a comment than an answer, as it does not detail the pros and cons of any textbook, only mentions one. $\endgroup$
    – Richard Hardy
    Jun 24, 2020 at 15:02

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