BUS-F600 Asset Pricing Theory

• 15 weeks
• 3 credits
• Prerequisite(s): microeconomics, calculus, linear algebra, probability

This is a course for the first-year doctoral students in finance. The course introduces the basic theory of asset pricing and focuses on the topics that are regarded as fundamental or that are widely useful for applications. The class discussions and assignments prepare students for reading academic papers that deal with theoretical economic issues on the prices in security markets. The topics cover both static and dynamic asset pricing theories. The course builds a coherent foundation for both intuitive economic ideas and rigorous analytical skills in asset pricing theory. These ideas and skills are necessary for students who plan to pursue either theoretical or empirical research in financial economics.

SAMPLE COURSE OUTLINE

Part I: Static asset pricing theories

• Mean-variance analysis
• Arbitrage
• State prices and discount factors
• Pricing kernel
• Risk-neutral probability
• Factor models
• The arbitrage pricing theory (APT)
• Portfolio choice
• Competitive equilibrium in asset markets
• The capital asset pricing model (CAPM)
• Pareto optimality
• Representative agent
• The consumption-based model (CCAPM)

Part II: Dynamic asset pricing theories

• Complete and incomplete markets
• Arbitrage and replicating portfolios
• State prices
• Radon-Nikodym derivatives
• Martingale measures
• Dynamic portfolio choice
• Competitive equilibrium
• Conditional CAPM
• Pareto optimality
• Representative agent
• Conditional CCAPM
• Inter-temporal asset pricing model (ICAPM)
• Dynamic programming and Bellman equation
• Valuation of derivative securities
• Stopping point and American options
• Markov stationary equilibrium models

MATERIALS:

• Dynamic Asset Pricing Theory by Darrell Duffie
• Principles of Financial Economics by Stephen LeRoy and Jan Werner
• Asset Pricing Theory by Costis Skiadas
• Selected Research papers