Asset pricing

In financial economics, asset pricing refers to a formal treatment and development of two interrelated pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.

Asset pricing models
Regime Asset class	Equilibrium pricing	Risk neutral pricing
Equities (and foreign exchange and commodities; interest rates for risk neutral pricing)	Capital asset pricing model Consumption-based CAPM Intertemporal CAPM Single-index model Multiple factor models Fama–French three-factor model Carhart four-factor model Arbitrage pricing theory	Black–Scholes Black Garman–Kohlhagen Heston CEV SABR Korn-Kreer-Lenssen
Bonds, other interest rate instruments	Vasicek Rendleman–Bartter Cox–Ingersoll–Ross	Ho–Lee Hull–White Black–Derman–Toy Black–Karasinski Kalotay–Williams–Fabozzi Longstaff–Schwartz Chen Rendleman–Bartter Heath–Jarrow–Morton Cheyette Brace–Gatarek–Musiela LIBOR market model

Investment theory, which is near synonymous, encompasses the body of knowledge used to support the decision-making process of choosing investments, and the asset pricing models are then applied in determining the asset-specific required rate of return on the investment in question, or in pricing derivatives on these, for trading or hedging.

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