Theory on the pricing of financial assets can be traced back to Bernoulli's famous St Petersburg paper of 1738. Since then, research into asset pricing and derivative valuation has been influenced by a couple of dozen major contributions published during the twentieth century. These seminal works have underpinned the key ideas of mean–variance optimisation, equilibrium analysis and no-arbitrage arguments. This paper presents a historical review of these important contributions to finance.

This paper examines the performance of the leading methods for setting capital requirements for securities firms' trading books. Tests are conducted on a large sample of UK equity market makers' books over a substantial number of periods of equity market stress from 1985 to 1995. The comprehensive and building-block approaches, favoured by US and European regulators, fail to provide effective cover. Only portfolio-based, value-at-risk (VaR) type models are efficient in providing appropriate levels of capital to cover the position risk of equity trading books.