78173 - Asset Pricing

Learning outcomes

The goal of the course is to introduce students to a sound knowledge of asset pricing using dynamic programming techniques. The pricing method is based on the intertemporal approach known as Consumption Capital Asset Pricing Model (Lucas, 1978), which represents a fundamental approach in financial economic theory on asset pricing. By the end of the course the student has acquired: - a good knowledge of fundamental notions of choice under uncertainty; - a good knowledge of basic tools for handling intertemporal maximization problems; - a good knowledge of the pricing technique known as Consumption Capital Asset Pricing Model; - a good understanding of the economic determinants of price fluctuations on financial markets.

Course contents

1. Introduction to asset pricing

2. Mean-variance models, CAPM and factor models

3. General equilibrium consumption-based asset pricing

4. Incomplete markets and financial innovation

5. Heterogeneous beliefs

6. Market microstructure theory

7. Market microstructure empirics

Readings/Bibliography

Cochrane J., “Asset Pricing”, 2001, Princeton University Press

O’Hara M., “Market Microstructure Theory”, 1995, Blackwell Publishers

Huang C. y R. Litzenberger, “Foundations for Financial Economics”, 1988, Prentice Hall

Brunnermeier M., “Asset Pricing under Asymmetric Information”, 2001, Oxford University Press

Ross S., “Arbitrage Theory of Capital Asset Pricing”, 1976, Journal of Economic Theory 13, 341-360

Breeden D., “An Intertemporal Asset Pricing Model with Stochastic Consumption and Investment Opportunities”, 1979, Journal of Financial Economics 7, 265-296

Lucas R., “Asset Prices in an Exchange Economy”, 1978, Econometrica 46, 1429-1445

Mehra R. and E. Prescott, “The equity premium: A puzzle”, 1985, Journal of Monetary Economics, 15(2), 145-161

Willen P., “New financial markets: who gains and who loses”, 2005, Economic Theory, 26, 141-166

Calvet L., Gonzalez-Eiras M., and P. Sodini, “Financial Innovation, Market Participation and Asset Prices”, 2004, Journal of Financial and Quantitative Analysis, 39(3), 431-459

Geanakoplos J., “The Leverage Cycle”, 2009, NBER Macroeconomics Annual, 1-65

Martin I. and D. Papadimitriou, “Sentiment and speculation in a market with heterogeneous beliefs”, forthcoming, American Economic Review

Glosten L. and P. Milgrom, “Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders”, 1985, Journal of Financial Economics 13, 71-100

Kyle A., “Continuous Auctions and Insider Trading”, 1985, Econometrica 53, 1315-1336

Kyle A., “ Informed Speculation with Imperfect Competition”, 1989, Review of Economic Studies 56, 317-355

Back K., “Insider Trading in Continuous Time”, 1992, The Review of Financial Studies, 5, 387-409

Back K. and S. Baruch, “Information in Securities Markets: Kyle Meets Glosten and Milgrom”, 2004, Econometrica, 72, 433-465

Campbell J., Lo A., and A. MacKinlay, “The Econometrics of Financial Markets", 1997, Princeton University Press, chapter 3.

Cipriani M. and A. Guarino, “Estimating a Structural Model of Herd Behavior in Financial Market”, 2014, American Economic Review, 104(1), 224-251

Kirilenko A., Kyle A., Samadi M. and T. Tuzun, “The Flash Crash: High-Frequency Trading in an Electronic Market”, 2017, Journal of Finance, 72(3), 967-998

Teaching methods

Lectures. There is no required text so you will have to take notes about what we will cover in class.

Assessment methods

Your grade will be based on (1) a final exam (80% of your grade), and (2) a class presentation of one paper to be done in pairs of students (20% of your grade). All presentations are in English, will take place on the last week of classes and must be done in three-person teams (depending on class size). I will assign papers to each team. Each team will have about 20 minutes (depending on class size). You must submit your presentation slides before the presentation. You will be graded both on clarity and content of the presentation.

The maximum possible score in the class is 30 cum laude, in case all answers are correct, complete and formally rigorous. The grade distribution is as follows:

<18 failed

18-23 sufficient

24-27 good

28-30 very good

30 e lode excellent

 

In case of an online exam, the exam will be run through Zoom or Teams and Exams Online (EOL). Detailed instructions on how to manage and hand in the online exam will be made available on the course page prior to the exam.

Teaching tools

Slides prepared by the instructor.

Office hours

See the website of Martin Gonzalez Eiras