Asset pricing at the millennium

This paper surveys the field of asset pricing. The emphasis is on the inter play between theory and empirical work and on the trade-off between risk an d return. Modern research seeks to understand the behavior of the stochasti c discount factor (SDF) that prices all assets in the Economy. The behavior of the term structure of real interest rates restricts the conditional mea n of the SDF, whereas patterns of risk premia restrict its conditional vola tility and factor structure. Stylized facts about interest rates, aggregate stock prices, and cross-sectional patterns in stock returns have stimulate d new research on optimal portfolio choice, intertemporal equilibrium model s, and behavioral finance.