Econ 645 Asset Pricing

Spring 2004

This Ph.D.-level course is an introduction to modern asset-pricing theory. We will develop the consumption-based asset pricing model, and portfolio-based models (CAPM, ICAPM, APT, CCAPM) as special cases. We will discuss methods of estimating and evaluating asset pricing models, fixed-income and derivatives pricing, and survey current asset pricing empirical work. The principle texts used in the course are Asset Pricing (AP) by John Cochrane, and The Econometrics of Financial Markets (EFM) by John Campbell, Andrew Lo, and Craig MacKinlay. The point of the course is to develop the unified framework for asset pricing theory that pervades modern applications in research. Grades will be based on homework (30%), class participation (10%), and a final examination (60%).

Topic Outline and Reading

 

  1. Consumption-Based Model and Overview (AP Ch. 1)

Problem set 1 Problem set 1 answers (password needed) 

 

  1. Applying the Basic Model (AP Ch. 2) Problem set 2

 

  1. Contingent Claims and Discount Factors (AP Chs. 3 and 4)

 

  1. Discount Factors, Betas and Mean-Variance Frontiers (AP Chs. 5 – 7)

 

  1. CAPM, ICAPM and APT (AP. Ch 9)

 

 

  1. Term Structure Models (EFM Chs 10 and 11, AP Ch 19)

 

    1. Real Rates, Expected Inflation and Inflation Risk Premia (Evans)
    2. Regime Shifts, Risk and the Term Structure (Evans)

 

 

  1. Option Pricing
    1. Basics and Discount Factor Pricing (AP Ch. 17)
    2. Replicating Portfolios (EFM Ch .9)
    3. Estimating CT models and Pricing by MC simulation (EFM Ch. 9)

 

  1. Empirical Puzzles (AP Ch 20, EfM Ch 7)

 

    1. New Facts in Finance (Cochrane)
    2. Dividend Variability and Stock Market Swings (Evans)
    3. Consumption-Based Asset Pricing (Campbell)
    4. Asset Pricing for the Millennium (Campbell)

 

  1. New Models

 

    1. Peso Problems and Distorted beliefs

                                                              i.      Peso Problems: Their Theoretical and Empirical Implications (Evans)

    1. Heterogenenous Agents and Idiosyncratic Risks (AP Ch. 21)

                                                              i.      Prices as Factors: Approximate Aggregation with Incomplete Markets (Telmer and Zin)

    1. Information-based models Microstructure

                                                              i.      Order flow and Exchange Rate Dynamics (Evans and Lyons)