FIN501 Asset Pricing Theory I
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 consumption-portfolio choice of an individual and the implications of this choice for the price of assets. Both topics are first considered in a one-period setting. This setting contains almost all important economic insights. The topics are then revisited in a generic multi-period 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 multi-period models of choice under uncertainty, like additive separable expected utility, habit formation, and recursive utility.
Mean-variance 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 (Hansen-Jagannathan bounds)
The role of complete markets and no arbitrage; equivalence between Arrow-Debreu economy, securities market equilibrium, SDFs, and risk adjusted probabilities (Equivalent Martingale Measures)
Multi-period consumption and portfolio choice; Dynamic Programing
Asset pricing in the Rubinstein-Lucas multi-period pure exchange economy; the role of zero net supply, and its implications for asset pricing in production economies; asset pricing with Epstein-Zin recursive utility
One-period asset pricing with heterogeneous information; information aggregation in complete markets, Grossman-Stiglitz partially revealing rational expectations equilibrium
Strategic use of information in trading; Kyles model of informed market makers
Incentives to trade; Milgrom and Stokey¿s no-trade theorem
After taking the course students should be able to
- demonstrate knowledge of the basic discrete-time asset pricing theory; both the general equilibrium theory and the partial equilibrium no-arbitrage theory
- 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
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.
Assignments constitute 40% of the total grade, while a final, closed-book written exam constitutes 60% of the total grade.
Grading scale: A - F.
"Theory of Asset Pricing," George Pennacchi
Notes and articles
"Asset Pricing," John H. Cochrane
"Foundations for Financial Economics," Chi-fi Huang and Robert H. Litzenberger
"Theory of Incomplete Markets," Michael Magill and Martine Quinzii
- ECTS Credits
- Teaching language
Jørgen Haug, Tommy Stamland