The fourth edition of this widely used textbook on pricing and hedging of financial derivatives
now also includes dynamic equilibrium theory and continues to combine sound mathematical
principles with economic applications. Concentrating on the probabilistic theory of continuous
time arbitrage pricing of financial derivatives including stochastic optimal control theory
and optimal stopping theory Arbitrage Theory in Continuous Time is designed for graduate
students in economics and mathematics and combines the necessary mathematical background with
a solid economic focus. It includes a solved example for every new technique presented
contains numerous exercises and suggests further reading in each chapter. All concepts and
ideas are discussed not only from a mathematics point of view but with lots of intuitive
economic arguments. In the substantially extended fourth edition Tomas Bjork has added
completely new chapters on incomplete markets treating such topics as the Esscher transform
the minimal martingale measure f-divergences optimal investment theory for incomplete markets
and good deal bounds. This edition includes an entirely new section presenting dynamic
equilibrium theory covering unit net supply endowments models and the Cox-Ingersoll-Ross
equilibrium factor model. Providing two full treatments of arbitrage theory-the classical delta
hedging approach and the modern martingale approach-this book is written so that these
approaches can be studied independently of each other thus providing the less
mathematically-oriented reader with a self-contained introduction to arbitrage theory and
equilibrium theory while at the same time allowing the more advanced student to see the full
theory in action. This textbook is a natural choice for graduate students and advanced
undergraduates studying finance and an invaluable introduction to mathematical finance for
mathematicians and professionals in the market.
