Course description

Asset Pricing Theory

Introduction

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.

Course content

  • 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

Learning outcome knowledge

This course will give the students an overview of the field of asset pricing theory.  The emphasis of this course is on the theoretical underpinnings of the field and prepare the students for independent research. Though the course will emphasize discrete-time frameworks, we may also cover some of the basics of continuous-time. After taking the course, the students will understand main concepts used in theoretical and applied asset pricing, such as no arbitrage, state prices, factor models, consumption-based asset pricing, heterogeneous-agent models, and production-based asset pricing.

Exam organisation

  • Written assignment: 30%
  • Written exam: 70%