Asset Pricing Theory
The objective of this course is to undertake a rigorous study of the foundations of modern financial economics in discrete-time settings. The course will cover the central themes of modern finance including investment decisions under uncertainty, mean-variance theory, dynamic capital-market equilibrium and asset valuation, and the potential application of these themes. Upon completion of this course, students should acquire a clear understanding of the major theoretical results concerning individuals' decisions under uncertainty and their implications for the valuations of securities.
- Introduction and overview, review of basic economic theory, some empirical facts
- Preferences, risk aversion
- Portfolio choice in a two-period model
- Markets: complete vs. incomplete, equilibrium, risk sharing
- Arbitrage, state prices, law of one price, stochastic discount factors
- Mean-variance analysis, beta representations
- Conditional vs. unconditional models
- Dynamic consumption-portfolio choice, dynamic programming
- Equilibrium models, consumption CAPM, special cases
- Exotic preferences: recursive, habit formation
- Production models
- Market imperfections: asymmetric information, transaction costs, capital immobility
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