BUS-F 600 Asset Pricing Theory
- 15 weeks
- 3 credits
- Prerequisite(s): Microeconomics, Macroeconomics, Calculus, Linear Algebra, Probability Theory
This is an introductory course designed for first-year doctoral students in finance. The course introduces basic theories of asset pricing and focuses on topics that are fundamental and widely useful in academic research. Through class discussions and assignments, students are prepared to understand academic papers dealing with theoretical issues related to security prices and financial markets. Although the primary focus is on dynamic asset pricing theories, classic static asset pricing theories are also included to foster a deeper understanding of the dynamics. The course provides a coherent foundation for both intuitive economic ideas and rigorous analytical skills in asset pricing theory. These ideas and skills are indispensable for students planning to pursue either theoretical or empirical research in financial economics.
Course Outline
- Information and Uncertainty
- Dynamic information filtration
- Stochastic processes
- Expectations and martingales
- Markov processes
- Asset Market and Trading
- Asset m arket
- Trading strategies in dynamic markets
- Asset market with Markov processes
- Market completeness
- Arbitrage and State Prices
- State prices
- Arbitrage
- Recursive state prices
- Price bubbles
- Risk Factors in Asset Prices
- Discount factors and pricing kernels
- Pricing securities by replication
- Linear models of risk factors
- The Arbitrage Pricing Theory (APT)
- Risk-Neutral Pricing
- Radon-Nikodym derivatives
- Short-term risk-free interest rate
- Risk-neutral probability
- Recursive risk-neutral pricing
- Preference and Risk Aversion
- Preference over risky consumption
- Expected utilities
- Risk aversion (Pratt's theorem)
- Knight's uncertainty aversion
- Recursive utilities
- Optimal Portfolio Choice
- Demand for risky assets
- Portfolio choice under Knight's uncertainty
- Optimal portfolio and state prices
- Dynamic programming
- Optimal stopping time
- Competitive Market Equilibrium
- Competitive equilibrium
- Pareto optimality and social planer
- Representative agent
- Markov stationary equilibrium
- Introduction to Continuous-Time Models
- Brownian motion
- Ito processes
- Black-Scholes model
- Arbitrage-free pricing
- Feynman-Kac solution
Materials
- Darrell Duffie: Dynamic Asset Pricing Theory, 3rd ed, Princeton University Press
- Kerry E. Back: Asset Pricing and Portfolio Choice Theory, 2/3 ed, Oxford University Press
- Costis Skiadas: Asset Pricing Theory, Princeton University Press
- Stephen LeRoy and Jan Werner: Principles of Financial Economics, 2nd ed, Cambridge University Press
- Selected academic research papers