Intermediate Financial Theory, Third Edition

Book Preface

For all the suffering that it has caused, the global financial crisis provides a unique opportunity to review what we know or thought we knew about finance. It will challenge and enliven the teaching of finance for years to come. The third edition of Intermediate Financial Theory is affected accordingly. While our own goals for the text have not changed, many new topics have been added and many examples have been taken from recent experience. The task of reviewing the entire material in light of the financial crisis is, however, a work in progress and one that cannot be adequately undertaken within the context of periodic revisions of a textbook of reasonable length. Accordingly, it will be pursued on an ongoing basis on the text’s website.

The third edition of Intermediate Financial Theory features 2 entirely new chapters and very substantial revisions to 11 more. With respect to the latter changes, there is greater emphasis on “behavioral finance” and many of the latest developments in portfolio theory are fully featured. The chapter on the consumption capital asset pricing model has been similarly expanded and brought to the theoretical frontier. Integral to the print version of the text are four Web Chapters. The intent of these chapters is to expand on the basic ideas presented in the text in ways that link them more directly to applied practice. Our review and assessment of the recent “financial crisis” is a particular case in point. Lastly, the third edition attempts to strengthen the link between theory and “the data”; that is, of evaluating a particular theory as regards its ability to replicate the associated data patterns, the so-called financial stylized facts.

While the market for financial textbooks is crowded at both the introductory and doctoral levels, it remains much thinner at the intermediate level. Teaching opportunities at this level, however, have greatly increased with the advent of masters of science programs in finance (master’s degree programs in computational finance, in mathematical finance, and the like) and the continuing demand for higher-level courses in MBA programs.