> For the complete documentation index, see [llms.txt](https://laurence-wilse-samson.gitbook.io/textbooks/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://laurence-wilse-samson.gitbook.io/textbooks/financial-economics-claims-prices-holders/preface.md). # Preface *Financial Economics: Claims, Prices, and Holders* Laurence Wilse-Samson *** ## What this book is This is a course text in financial economics, written for the one-semester or two-semester sequence that economics departments teach to advanced undergraduates and to masters students in finance, economics, and public policy. It assumes one statistics course at the level of multiple regression and calculus through partial derivatives, and nothing else. Its body contains no measure theory and assumes none. It is one volume rather than two because the questions it asks do not divide along the usual seam. Asset pricing and corporate finance are ordinarily taught in different rooms, and the effect is to hide the fact that the same claims appear in both: a firm designs and issues a security, an investor with a mandate and a capital charge buys it, and the price at which that transaction happens is a joint product of what the security promises and of what its buyer is permitted to hold. The book's subtitle names the three things it follows — the claims, their prices, and the people who end up owning them — and its organizing question is whether the third of these belongs in the theory of the first two. The book's answer is that it does, that this is now a measurable proposition rather than a rhetorical one, and that the measurement is the interesting part. The shelf this is written for is thin and has been for some time. The books that occupy it are excellent and old. The graduate texts that came after them are magnificent and are not teachable to a masters cohort in thirteen weeks. This one is written for the cohort, with a PhD-preparation track carried in starred sections that the body never depends on, and with a practitioner path through Part I read lightly, Parts III and IV read in full, and Chapter 26. Chapter 1 §1.5 explains the convention, and the For Instructors section that follows this one prints two thirteen-week syllabus maps and the chapter-dependency table behind them. A word about the register. Every chapter opens with a dated event — a settlement price, an index inclusion, a hedge that outlived the firm running it, a contract between two Detroit companies in 1919 — because the machinery of this subject is easier to learn when there is something in front of it that the machinery is needed to explain. This is not decoration and it is not case-method teaching. The episodes are chosen so that the theory is what makes them legible, and several of them are impossible to explain any other way. *** ## The series This volume is part of a portfolio of institutionalist textbooks. They share a method and divide a subject, and the division is stated here so that a reader knows where each boundary runs before meeting it in the text. | Volume | Owns | Status | | ---------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | | **Financial Economics: Claims, Prices, and Holders** (this book) | Valuation and asset pricing theory; asset markets and their pricing; the ecology of investors and what their constraints do to prices; firms as issuers of claims; risk measurement | This volume | | **International Finance** | The money view: money markets and the hierarchy of money, payments and settlement, banking and nonbank institutions as a taxonomy, foreign exchange, the derivative and equity markets as markets (sizes, users, clearing, margin, exchange-traded fund mechanics), central banks and the international monetary system, regulatory architecture, crisis institutions | Complete | | **Institutionalist Macroeconomics** | Measurement-first macroeconomics: the national and financial accounts as a system, sectoral balances, the financial accelerator and its general-equilibrium closure, wealth distribution and aggregate demand | Complete | | **The 2008 crisis volume** | The ecology's fullest exhibit: the mortgage industry and the originate-to-distribute pipeline, the securitization and ratings narrative, the runs and the fire sales, and what the models did under stress | In progress | | Further volumes | History of economic thought; empirical methods; law and economics; philosophy of economics | In progress | The rule the boundaries follow is one sentence long: **defer for depth, never for prerequisites.** A course adopting this book assigns this book alone. Nothing a reader needs in order to proceed lives in another volume — Chapter 2 keeps its own balance-sheet primer even though *Institutionalist Macroeconomics* owns the accounting system, Chapter 16 keeps a compact statement of the hierarchy of money even though *International Finance* owns the hierarchy, and Appendix A is self-contained for every empirical method the chapters use. Cross-references point onward for more, never backward for something missing. Where a boundary exists, it is marked in the text rather than in a registry, because registries rot and text does not. Every chapter from the second on ends with a block headed **Elsewhere in the Series** naming what it has deliberately not done and where that material lives. Chapter 8 prices derivatives and says so plainly that the markets those instruments trade in — sizes, users, clearing, margin — are *International Finance*'s. Chapter 13 prices mortgage securities and hands the underwriting collapse to the crisis volume. Chapter 27 states the financial accelerator in a line and hands the model to the macro volume. A reader who wants to know what this book is *not* about can read those blocks alone and find out in twenty minutes. *** ## What the volumes share Five commitments run through all of them. **Measurement is a form of knowledge.** How a quantity is constructed, by whom, from what source, with what revisions and what known biases, is part of what the quantity means. This book's second chapter is a measurement chapter for exactly that reason, and its central table is cited by every part that follows. **Institutional detail is not a complication to be abstracted away.** Risk-based capital rules, index construction methodologies, redemption terms, the design of a 401(k) enrollment form, and the tax treatment of municipal interest are not friction on top of the economics. In this book they are frequently the economics, because they determine who may hold what, and holdings determine prices. **Power and distribution belong in the analysis.** Who bears a risk, who captures a return, and who decides are questions with answers, and the answers change what the aggregates mean. When Chapter 14 shows that a large majority of directly held equity sits with the top decile of the wealth distribution, that is not a distributional footnote appended to an asset pricing chapter; it is a statement about whose consumption the model in Chapter 5 is being tested against. **Arrangements are historically contingent.** The defined-benefit pension, the exchange-traded fund, the agency guarantee, and the investment-grade index mandate were all invented, and each could have been invented differently. Chapter 2's fifty-year reallocations exist to make that visible. **Methodological pluralism, with standards.** Formal models, econometric identification, institutional description, and narrative evidence all appear, each held to the standard appropriate to it. A model is judged by what it implies and what it assumes away; an empirical claim by its design and the population it identifies an effect for; a narrative by its sources. What is not permitted is borrowing the authority of one for the work of another. *** ## Sources, numbers, and reproducibility Every table in this book states its source. Where a magnitude comes from a single study, the study is named in the sentence that reports it, so that a reader can tell the difference between a fact of the national accounts and a coefficient somebody estimated on one sample. Where an estimate is contested, the book says so and says by whom; Chapter 20 §20.5 prints a table grading the state of the evidence in the literature that the book's own flagship chapter is built on, including three rows that go against it. Every worked number in this book — every present value, every portfolio variance, every binomial tree, every duration, every fee arithmetic, every solved problem — has been verified computationally rather than carried over from a source. Where a figure is an approximation or a rounded magnitude, it is written as one. Chapter-end data exercises follow a free-data-first rule. The baseline version of every exercise runs on sources that cost nothing and require no institutional subscription: the Federal Reserve's Financial Accounts, FRED, Kenneth French's data library, Robert Shiller's series, EDGAR and 13F filings, and the statistical releases of the relevant agencies. Exercises that would be better with licensed data carry a starred extension for readers who have it, and the star means "if you have WRDS," not "if you are serious." Appendix B catalogs every source used, flagged free or licensed. *** ## Notation and conventions An equation-heavy book drifts. This one is written against a registry — a single table of every symbol, what it means, where it is first stated, and, where a letter carries more than one sense, the explicit note that the senses never co-occur and what separates them on the page. Chapter 3 introduces the core block in the order the registry lists it, and every later chapter conforms. Readers who find a symbol unfamiliar should look for it there before assuming it is new. Three conventions are worth stating in advance because they differ from some of the literature. Capital $$R$$ is a gross return and lower-case $$r$$ is a net return, and the pricing equation is always written in gross terms. The stochastic discount factor is lower-case $$m$$ throughout, with $$M$$ reserved for the market portfolio's subscript. And the star does four jobs that are kept apart by context: on a probability or an expectation it marks the risk-neutral object, on a choice variable it marks an optimum, in one chapter it marks Shiller's ex-post rational price, and in a section heading — as ★ — it marks a PhD-track section that the body never depends on. A note on money and on spelling: dollar amounts are written with the symbol or in words, American spellings are used throughout, and where a number could be misread as a formula it has been rewritten. *** Chapter 1 begins with an oil contract that settled at a negative price, and with the three questions that make it comprehensible.