[...]... in consumption risk While much of the material covered in this book examines trade in financial markets and the pricing of financial securities, there are important links between the real and financial variables in the economy After all, financial markets function to facilitate the trades in real consumption, where financial securities reduce trading costs, particularly when consumption is transferred... pricing models in financial economics, particularly in the presence of uncertainty Consumers will not pay a positive price for any asset unless it is expected to generate a net consumption flow for them in the future In many cases these benefits might be reductions in consumption risk rather than increases in expected consumption In fact, a large variety of financial securities trade in financial markets... economy by allowing consumers to trade financial securities As noted by Arrow (1953), financial securities can significantly reduce the number of transactions Instead of trading a separate forward contract for each good consumed in the future, consumers can trade money and financial securities with future payouts that can be converted into goods Thus, money and financial securities can be used as a... to the weighted average formula using the analysis in Sjaastad and Wisecarver 1.2 Concluding remarks Financial economics is a challenging subject because it draws together analysis from a number of fields in economics Indeed, modern macroeconomic analysis uses general equilibrium models with money and financial securities in a multi-period setting with uncertainty Time and risk are fundamental characteristics... principles that underpin activity in financial markets Starting in a certainty setting the analysis is extended gradually so that readers can develop a framework for understanding how time and risk impact on the allocation of resources, both in the private and public sectors of the economy By exposing the fundamental economic principles in financial markets, financial economics provides a clearer understanding... role for (fiat) money and financial securities It is quite easy to overlook some of the important roles of money and financial securities in a more general setting with risk, taxes, externalities and asymmetric information In a certainty setting without taxes and other distortions consumers use them to reduce the costs of moving goods around the exchange economy Money and financial securities will... and investment opportunities There are physical and financial capital assets: physical assets such as houses and cars generate real consumption flows plus capital gains or losses, and financial assets have monetary payouts plus any capital gains or losses that can be converted into consumption goods There are important links between them as many financial assets are used to fund investment in physical... are financial securities whose values derive from other financial securities, but the term is used more widely to include options and forward contracts for commodities.5 Micu and Upper (2006) report very large increases in the combined turnover in fixed income, equity index and currency contracts (including both options and futures) on international derivatives exchanges in recent years Most of the financial. .. and competitive markets where traders have common information In this setting the financial policy irrelevance theorems of Modigliani and Miller (1958, 1961) hold, where financial securities are a veil over the real economy That is not to say these securities are irrelevant to the real economy, but rather, the types of financial securities used and the way they make payouts, whether as consumption,... into the economics of asset pricing, and is well supported by the book by Yvan Lengwiler (2004) that carefully establishes the properties of the consumption-based pricing model where the analysis in Cochrane starts Introduction 3 In this book I have expanded the material on corporate finance and included material on project evaluation Corporate finance is an ideal application in financial economics . Chris, 195 3- Financial economics/ Chris Jones. p. cm. Includes bibliographical references and index. 1. Finance. 2. Economics. I. Title. HG173.J657 2008 332–dc22 2007032310 ISBN10: 0-4 1 5-3 758 4-3 (hbk) ISBN10:. (hbk) ISBN10: 0-4 1 5-3 758 5-1 (pbk) ISBN10: 0-2 0 3-9 320 2-1 (ebk) ISBN13: 97 8-0 -4 1 5-3 758 4-9 (hbk) ISBN13: 97 8-0 -4 1 5-3 758 5-6 (pbk) ISBN13: 97 8-0 -2 0 3-9 320 2-5 (ebk) “To purchase your own copy of this. that studies economic activ- ity in financial markets, focusing on how consumers determine future consumption and on the role of financial securities. Areas covered in the book include: • An examination