The course introduces students to modern portfolio choice theory and asset pricing. We will derive the implications of the financial equilibrium model for hedging strategies. We will employ the “no-arbitrage” principle to derive pricing algorithms for fixed-income and risky assets. We will discuss the limitations of the idealized frictionless framework.
We will talk about incomplete, thin markets and insider trading. Finally, we will discuss the empirical tests of the introduced theories, including pricing anomalies. The course should give you a broad picture of practitioners’ thinking, including policymakers,institutional investors (hedge funds or mutual funds), and market makers.
Goal: The course is designed for master’s students but is also open to undergraduate and Ph.D. students. Qualified undergraduates must receive permission from the instructor to register for the course. The primary purpose of this course is to teach you how to use the microeconomic tools to understanding contemporaneous financial markets. We will also heavily rely on numerical methods, learning/honing our python programming skills.
TA: Yunhan Justin Shin, firstname.lastname@example.org
This is a four (4) unit semester-long course consisting of two 75-minute lectures per week. Students are expected to work approximately five hours per week outside of the class to complete the assignments and review the relevant material. You are strongly encouraged to come to my office hours, where we will be solving assigned problems.
Office Hours: Monday 3:45-4:45
Intermediate microeconomic course is strongly recommended. Since finance is a quantitative subject, in this course we will exercise some elementary mathematics.
Therefore, students must also be able to differentiate elementary functions, and thus one semester of calculus is recommended as well.Textbooks:
The main (and sufficient) sources of learning are lecture notes, lecture slides, and problem sets. There is no official textbook for this Masters course. The textbooks recommended below clarify and elaborate on the presented material:
- Danthine & Donaldson (2004). Intermediate Financial Theory. 2nd edition,Elsevier.
- Lengwiler (2004). Microfoundations of Financial Economics: An Introduction to General Equilibrium Asset Pricing. Princeton University Press
You may also find useful the following supplementary reading:
- Bodie, Zvi, & Merton (2000). Finance. Upper Saddle River, New Jersey: Prentice Hall.
- Elton & Gruber (1995). Modern Portfolio Theory and Investment Analysis. 5th edition, New York: John Wiley & Sons, Inc.
- Fabozzi, Frank (2001). Handbook of Mortgage Backed Securities. 6th edition,New York: McGraw-Hill.
- Fabozzi (2000). Handbook of Fixed Income Securities. 6th edition, New York: McGraw-Hill.
- Ross, Westerfield, & Jaffe (1999). Corporate Finance. New York: Irwin,McGraw Hill.
- Sharpe, Alexander, & Bailey (1999). Investments. 6th edition, Upper Saddle River, NJ: Prentice Hall.
Two midterm exams and a final exam will be administered. Review sections will be given in class before each of the three exams. Every week, students will be assigned a problem set that they are expected to solve and hand in one week later (at the beginning of class on Thursday). Grades will be weighted as follows to determine final grades:
Midterm exams = 20% (×2)
Final exam = 30%
Problem sets = 30%
Alternative to final: python programming project
Final exam date: TBD
Problem sets and slides will be posted on the course website prior to each class.Course outline
The following is a list of topics I will cover in the course:
Financial Equilibrium Model (EM)
L1 (Sep 8): Introduction: Why do Financial Markets Exist?
L2 (Sep 13): The Equilibrium Model
L3 (Sep 15): The Equilibrium Pricing and Arbitrage
L4 (Sep 20): Efficiency, Aggregation (HARA)
EM Application 1: Dynamic Markets
L5 (Sep 22): Irving Fisher Theory of Interest Rate
L6 (Sep 27): Fisher Prices and Present Value Analysis
L7 (Sep 29): Treasury Bills and Corporate Bonds
L8 (Oct 4): Mortgages and Real Estate
L9 (Oct 6): Yield Curve and Arbitrage
L10 (Oct 11): Review
L12 (Oct 13): Midterm I
FEM Applications 2: Uncertainty
L13 (Oct 18) Uncertainty and Risk Aversion
L14 (Oct 20) HARA utilities and portfolio selection
L15 (Oct 25) Insurance
L16 (Oct 27) Mean Variance Analysis and CAPM
L17 (Nov 1) Consumption CAMP
L18 (Nov 3) Efficient Markets Hypothesis and Pricing Anomalies
L19 (Nov 8) Review
L20 (Nov 10) Midterm II
L21 (Nov 15) Incomplete Markets
L22 (Nov 17) Options and Asset Innovation
L24 (Nov 22): Leverage Cycle and Systemic Risks
L25 (Nov 29): Thin Markets and Liquidity
L26 (Dec 1): Price Impact and Blockage Discount
L27 (Dec 6): Asymmetric Information and Insider’s Trading
L28 (Dec 13): Review
Exam (Date TBD)Basic rules (This is a large class, and therefore I will be strict about these rules)
- Problem sets submitted after the deadline will not be accepted (deadline is the beginning of class on Thursday).
- Students are strongly encouraged to collaborate with other students on problem sets but to submit their own answers (two identical copies will not be accepted).
- No midterm or final will be rescheduled for any student and for any reason.
- If unhappy with a midterm grade, students will have one week to put in writing a formal complaint, explaining carefully why the grade should be changed. In such a case, the midterm grade will be revaluated (students’ grades can go up or down).
- If you have any questions regarding problem sets, please contact your TA.
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