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Finance and the Economics of Uncertainty


Economics and Finance of Uncertainty explores the growing range of economic decisions that are conducted under uncertainty both on the personal level – such as individual savings, insurance, portfolio choices – as well as by large firms, including insurance companies and stock exchanges, that utilize financial tools to facilitate the exchange of risks.

Presenting the basic principles and discussing them in a unified framework within elementary models, this text analyzes the allocation of risk in the context of the current literature, and emphasizes the role of information in decisions and prices. Including end-of-chapter exercises, this book provides students with a tool for understanding the theoretical analysis of decision-making under uncertainty, and its applications to the world of economics and finance.

Gabrielle Demange is Director at EHESS (Ecole des Hautes Etudes en Sciences Sociales) and researcher at PSE (Paris-Jourdan Sciences Economiques), and is Co-Editor of the journal Economic Theory.

Guy Laroque is Director of the Macroeconomic Laboratory at INSEE-CREST (Institut National de la Statistique et des Etudes Economiques-Centre de Recherche en Economie et Statistique) as well as a former Editor of Econometrica (1992-1996).

List of main symbols.


I. Value by Arbitrage.

1. Financial instruments: an introduction.

2. Arbitrage.

II. Exchanging Risk.

3. Investors and their information.

4. Portfolio choice.

5. Optimal risk sharing and insurance.

6. Equilibrium on the stock exchange and risk sharing.

7. Trade and information.

8. Intertemporal valuation.

III. The Firm.

9. Corporate finance and risk.

10. Financing investments and limited liability.