The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd


  • Stephen A. Ross
Reference work entry


The neoclassical theory of finance is based on the study of (a) efficient markets, meaning markets that use all available information in setting prices, (b) the trade-off between return and risk, (c) option pricing and the principle of no arbitrage, and (d) corporate finance, that is, the structure of financial claims issued by companies. This article surveys these theories and their empirical support and it also identifies certain empirical regularities unexplained by the neoclassical theory that are being addressed by theories of asymmetric information.


Arbitrage Arbitrage pricing theory Arrow-Debreu model Asymmetric information Black-Scholes model Capital asset pricing model Consumption beta model Corporate finance Corporate taxation Efficiency Efficient markets hypothesis Finance Hicks, J. Interest rates Martingales Mean variance analysis Merton, R. Modigliani-Miller theorem Option pricing Pareto efficiency Principal and agent Productive efficiency Rational expectations Risk and return Risk premium Security market line equation Signalling models Tobin, J. von Neumann-Morgenstern utility function 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Stephen A. Ross
    • 1
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