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

The course will gradually build the intertemporal asset pricing model by sequentially discussing the following topics:

1. Fundamental notions of choice under uncertainty.
2. Optimal intertemporal allocations in General Equilibrium.
3. Fundamental notions of dynamic programming.
4. Putting it all together: the Consumption Capital Asset Pricing Model of Lucas (1978).

Readings/Bibliography

A set of typed notes will be supplied by the instructor. As a complement, the student can consult:

• Chapter 2 in Advanced Microeconomic Theory (3rd ed.) by Jehle and Reny.
• Chapters 2, 3, and 5 in "Microeconomic Theory" by Andreu Mas-Colell, Michael D. Whinston, Jerry R. Green (1995)
• Chapters 1-6 in "Recursive Methods in Economic Dynamics," by Nancy L. Stokey, Robert E. Lucas Jr. and Edward C. Prescott (1989)
• Chapters 1-5 in "Dynamic Macroeconomic Theory," by Thomas J. Sargent (1987)

Teaching methods

The lectures are divided into two complementary parts, Theory and Exercises. The theory part will develop the theoretical platform to price assets. Exercises will be conducted at regular intervals, as a pedagogical aid. There is no required text so you will have to take notes about what we will cover in class (typed notes will be provided, when feasible).

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 20 to 30 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.

Teaching tools

Slides prepared by the instructor.

Office hours

See the website of Gabriele Camera