Latest update: February 20, 2019.
Office: D521 (Building 2)
Office hours: by appointment
This course aims to provide a comprehensive introduction to the pricing of financial assets. We will cover the main pillars of asset pricing, including choice theory, portfolio theory, Arrow-Debreu pricing, arbitrage pricing, and dynamic models.
Students require a solid knowledge in mathematics, including calculus, probability theory, and optimisation.
The final grade is computed as follows:
- Assignments: 60%
- Presentation of a research paper: 40%
I have several papers to choose from, but you can also propose one on your own.
The assignments are available here: pdf.
- Introduction (slides)
- Main topics:
- The objectives of asset pricing
- Different approaches to value risky cash flows
- Readings:
- Choice Theory, Utility Functions, and Risk Aversion (slides)
- Main topics:
- Introduction to choice theory
- Definition and measures of risk aversion
- Important utility functions: quadratic, exponential, log, and power
- Readings:
- DD (Chapters 3 and 4)
- Back (Chapters 1 and 20)
- Portfolio Theory (slides)
- Main topics:
- Risk aversion and portfolio choice
- Definition and solution of the canonical portfolio problem
- Simplification of the portfolio problem through mean-variance preferences
- Computing the frontier with n risky assets
- Computing the frontier with n risky and one riskless asset
- Readings:
- DD (Chapters 5 and 6)
- Back (Chapters 2 and 5)
- Additional material:
- Notes for vector and matrix differentiation: pdf.
- Matlab script and data to calculate optimal portfolio: zip.
- Capital Asset Pricing Model (slides)
- Main topics:
- Capital market line
- Security market line
- Readings:
- DD (Chapter 7)
- Back (Chapter 6)
- Arbitrage Pricing Theory and Factor Models (slides)
- Main topics:
- Factor structure of stock returns
- The market model
- Arbitrage arguments and the pricing equations
- Fama and French's 3-factor model
- Application to fund performance
- Readings:
- DD (Chapter 13)
- Back (Chapter 6)
- Arrow-Debreu Pricing (slides)
- Main topics:
- Financial markets and social welfare
- Arrow-Debreu economy
- Market completeness and complex securities
- Readings:
- DD (Chapters 8 and 10)
- Back (Chapter 3)
- Risk Neutral Pricing (slides)
- Main topics:
- Stochastic discount factor
- Hansen-Jagannathan bound
- Risk neutral probabilities
- Readings:
- DD (Chapter 11)
- Back (Chapter 4)
- The Consumption Capital Asset Pricing Model (slides)
- Main topics:
- The formal Consumption CAPM
- Risk-neutral pricing in the Consumption CAPM
- Testing the Consumption CAPM
- Readings:
- Dynamic Models (slides)
- Main topics:
- The binomial model of derivatives valuation
- Dynamic securities markets
- Euler equation
- Readings:
- Back (Chapter 8)
- DD (Chapter 12)
- Danthine, J-P. and J. Donaldson, 2005, Intermediate Financial Theory, 2nd edition, Elsevier Academic Press. [DD]
- Back, 2010, Asset Pricing and Portfolio Choice Theory, Oxford University Press. [Back]