FIN501 Asset Pricing Theory I

Topics
Topics
Asset Pricing I covers basic results in asset pricing. The models covered are formulated in discrete time. The two major topics in the course are the optimal consumptionportfolio choice of an individual and the implications of this choice for the price of assets. Both topics are first considered in a oneperiod setting. This setting contains almost all important economic insights. The topics are then revisited in a generic multiperiod setting. This extension allows one to consider how individuals react to new information about the economic environment. The course also covers the basics of popular multiperiod models of choice under uncertainty, like additive separable expected utility, habit formation, and recursive utility.
Topics:
Meanvariance portfolio choice
The Capital Asset Pricing Model (CAPM) and Black¿s CAPM; what the basic building blocks/assumptions are, and the models¿ implications for asset pricing and portfolio choice
Ross Arbitrage Pricing Theory (APT); its basic assumptions, and implications
Stochastic Discount Factors (SDFs); their relationship to individual optimality (the Euler equations), and no arbitrage; their implications for asset pricing (state price beta model), and asset pricing tests (HansenJagannathan bounds)
The role of complete markets and no arbitrage; equivalence between ArrowDebreu economy, securities market equilibrium, SDFs, and risk adjusted probabilities (Equivalent Martingale Measures)
Multiperiod consumption and portfolio choice; Dynamic Programing
Asset pricing in the RubinsteinLucas multiperiod pure exchange economy; the role of zero net supply, and its implications for asset pricing in production economies; asset pricing with EpsteinZin recursive utility
Oneperiod asset pricing with heterogeneous information; information aggregation in complete markets, GrossmanStiglitz partially revealing rational expectations equilibrium
Strategic use of information in trading; Kyles model of informed market makers
Incentives to trade; Milgrom and Stokey¿s notrade theorem

Learning outcome
Learning outcome
After taking the course students should be able to
 Knowledge:
 demonstrate knowledge of the basic discretetime asset pricing theory; both the general equilibrium theory and the partial equilibrium noarbitrage theory
 Skills:
 understand and carry out formal proofs, and thus to extend the theory
 critically evaluate not only the formal aspect of models in the area, but also their economic relevance and their critical assumptions
 General competence:
 read and understand research papers in the area
 apply the theory to new problems, whether theoretical or empirical

Teaching
Teaching
Regular lectures.

Required prerequisites
Required prerequisites
Course participants are expected to have basic training in investments and micro economics, at least corresponding to FIE400 and ECO401. The course moreover assumes familiarity with very basic linear algebra and optimization, and some more familiarity with basic probability theory. More advanced topics, like properties of conditional expectation, are briefly covered in the course.

Requirements for course approval
Requirements for course approval
Assignments must be passed and completed within set deadlines.

Assessment
Assessment
Assignments constitute 40% of the total grade, while a final, closedbook written exam constitutes 60% of the total grade.

Grading Scale
Grading Scale
Grading scale: A  F.

Computer tools
Computer tools
none

Semester
Semester
Autumn 2017

Literature
Literature
Main literature:
"Theory of Asset Pricing," George Pennacchi
Notes and articles
Recommended reading:
"Asset Pricing," John H. Cochrane
"Foundations for Financial Economics," Chifi Huang and Robert H. Litzenberger
"Theory of Incomplete Markets," Michael Magill and Martine Quinzii
Overview
 ECTS Credits
 7.5
 Teaching language
 English.
 Semester
 Autumn
Course responsible
Jørgen Haug, Tommy Stamland