• Table of Contents
    • Abstract
    • Keywords
    • Article
      • Efficient markets
        • Empirical testing
        • Theoretical formulations
      • Risk and return
        • The mean variance capital asset pricing model (CAPM)
        • Inter-temporal models
        • Arbitrage pricing theory (APT)
        • Empirical testing of asset pricing models
      • Substitution and arbitrage: option pricing
        • The binomial model
        • The general theory of arbitrage
        • Empirical testing
      • The whole is the sum of the parts – corporate finance
        • The Modigliani–Miller analysis
        • Spanning arguments
        • Signalling models
        • Taxes
        • Agency models
        • Empirical evidence
      • Conclusion
    • See Also
    • Bibliography
    • How to cite this article


Stephen A. Ross
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
Alternate versions available: 1987 Edition
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The neoclassical theory of finance is based on the study of (a) efficient markets, meaning markets that use all available information in setting prices, (b) the trade-off between return and risk, (c) option pricing and the principle of no arbitrage, and (d) corporate finance, that is, the structure of financial claims issued by companies. This article surveys these theories and their empirical support and it also identifies certain empirical regularities unexplained by the neoclassical theory that are being addressed by theories of asymmetric information.
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How to cite this article

Ross, Stephen A. "finance." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 17 January 2018 <http://www.dictionaryofeconomics.com/article?id=pde2008_F000071> doi:10.1057/9780230226203.0566

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