Modern Investment Theory: Implications for Bubbles and Crises

The core of Modern Investment Theory: Implications for Bubbles and Crises delivers in simple terms the classic theoretical issues of the investment environment. This includes portfolio theory, the Capital Asset Pricing Model (CAPM), Consumption-CAPM (CCAPM), Arbitrage Pricing Theory (APT), Merton's Intertemporal-CAPM (ICAPM), as well as the pricing of bonds and options. However, as the recent history of financial markets proves, the financial system might rapidly turn unstable. This will typically occur after bubbles grow and crash, sometimes deteriorating into a crisis of the real economy. Therefore, modern MBA students must command not only equilibrium theoretical models that imply stability, but also understand how seemingly minor changes to existing models throw a stable system out of balance. Cases in point include the poor US regulation and political lobbying that contributed to the 1929, Dot.Com, and real-estate bubbles, as well as the corporate governance scandals in the early 2000s.

In light of the global nature of modern financial markets, students must be able to analyze the ways macroeconomic risks impinge on the financial system. To this end, the text includes a comprehensive section on international finance, coupled with descriptions of a few multinational financial crises. In particular, we discuss how global financial crises erupted in Japan, Mexico, and Argentina, as well as the complex interactions between China and the US.

Unlike many books on classic investment theory, this book specifically examines how the theory is related to bubbles and crises at the country level and international level, providing a fresh take on how the theory can be used as a benchmark to understand other financial market anomalies.

This text discusses the sub-prime mortgage crisis and the subsequent global credit crisis in detail, and highlights their relation to complex derivatives and short-term financial instruments. It also covers behavioral finance and its implications for mis-pricing and bubbles; it elaborates on the event-study methodology and financial market anomalies.