97473 - MACROFINANZA

Learning outcomes

At the end of the course, the student will have learned the main techniques needed for the analysis of price movements in financial markets and their decomposition in terms of risk measure and market price of risk. Among the technical tools, the student will be required to master the abiility of: i) evaluating financial assets both under the "physical" risk measure P and the risk adjusted measure Q, both for investments on short and long term; ii) extract information on this measure from financial market prices (implied volatility and distributions in option prices, implied default probabilities, etc...). The student will also be required to have adequate knowledge of the main techniques of risk measurement at the macroeconomic level, articulated in terms of systemic risk and contagion, and its effects on the real economy.

Course contents

Financial Markets under Measure P and Q

1. APT Model (Arbitrage Pricing Theory) and Risk Premium
   
2. Risk Adjusted Risk Measure and Martingale Pricing
3. Expected Utility vs Law of Large Numbers Models
   
4. Stochastic Discount Factor
5. Implied information in market prices and "recovery theorem"
   

Systemic Risk and Financial Crises

1. “Single Name” Credit Risk: Spread, CDS and Equity
   
2. “Multi Name” Credit Risk: Securitisations
   
3. The Subprime Mortgage Crisis
   
4. The European Sovereign Debt Crisis
   
5. Systemic Risk Measures
   

Readings/Bibliography

Selected Chapters in Books:

John H. Cochrane: Asset Pricing, 2009 Princeton University Press

John Y. Campbell, Andrew W. Lo and A. Craig MacKinlay, The Econometrics of Financial Markets, 1999 Princeton University Press,

Main Reference Articles:

John H. Cochrane: Macrofinance, 2017, Review of Finance, 945-985

John Y. Campbell: Asset Pricing at the Millennium, 2000, Journal of Finance, 1515-1567

Lars P. Hansen, Eric Renault: Pricing Kernels, 2010, in Encyclopedia of Quantitative Finance, Wiley Online Library

Stephen Ross: The Recovery Theorem, 2015, Journal of Finance, 615-648

Jaroslav Boroviska, Lars P. Hansen, José A. Scheinkman: Misspecified Recovery, 2016, Journal of Finance, 1493-2544

Peter Carr, Yang Yu, Risk, Return and Ross Recovery, The Journal of Derivatives

Lars P. Hansen, Eric Renault: Pricing Kernels, 2010, in

Viral V. Acharya, Lasse H. Pedersen, Thomas Philippon, Matthew Richardson, Measuring Systemic Risk, 2017, Review of Financial Studies, 2-47

Tobias Adrian and Markus T. Brunnermeier, CoVaR, 2011, NBER

Markus. T. Brunnermeier, Sam Langfield, Marco Pagano, Ricardo Reis, Stjin Van Nieuwerburgh, Dimitri Vayanos, ESBies: Safety in the Tranches, 2017,Economic Policy, 175-219

Teaching methods

Lectures

Assessment methods

 The exam will be based on:

1. a term paper
   
2. an oral examination in which the student will discuss the term paper and then will answer questions about the subjects covered in the whole program.

The term paper or portfolio analysis will account for up to 5 points in the final grade.

The term paper should consist of

1. an introduction to the problem or topic chosen
2. a review of the literature on the subject
3. an illustrative example with data, either real or simulated

The maximum possible score is 30 cum laude.

The grades are described as follows

< 18 failed

   18-23 sufficient

   24-27 good

   28-30 very good

   30 cum laude Excellent

Teaching tools

Exercises with market data.

Office hours

See the website of Umberto Cherubini