Asset Pricing / Asset Pricing

Studyboard of Market and Management Anthropology, Economics, Mathematics-Economics, and Environmenta, Odense
Teaching activity id: 8829301.
Teaching language: English.ECTS / weighting: 10 ECTS / 0.167 full-time equivalent.
Examination language: English.
Exam activity id: 8829302.Approved: 13-09-16.
Period: Spring 2017.
Grading: Internal grading.
Assessment: 7-point scale.
Offered in: Odense.

Subject director:
Thiago de Oliveira Souza, Department of Business and Economics.

Prerequisites:
This course requires that you have some prior knowledge of financial markets and financial instruments, basic statistics (for instance, linear regressions, hypothesis testing, variances and covariances, etc.), single and multivariable calculus, simple differential equations, and matrix algebra. These are all competences acquired, for example, in the courses "Matematik" (course no. 9105701) and "Statistik" (course no. 9116001) which are based on the textbooks:
* Knut Sydsaeter and Peter Hammond, Essential Mathematics for Economic Analysis, Pearson Education, 3rd edition 2008.
* Malcow-Møller, N. og Allan Würtz "Indblik i Statistik", latest edition.

You should also be familiar with simple continuous-time diffusion models, covered for instance in the course "Derivatives and Risk Management" (course no. 9427401) which is based on the textbooks:
* Hull, J.C.: "Options, Futures, and Other Derivatives", Prentice Hall.
* Munk, C.: "Fixed Income Modeling", Oxford University Press.
 
Finally, you will be required to do some simple programming in the course. Although not a prerequisite, familiarity with a matrix programming language like Matlab, or R is helpful. Taking this course together with time series econometrics will also help in the empirical applications.

Purpose:
This course gives a thorough introduction to theoretical equilibrium models, their assumptions and derivations. It explains, for instance, concepts like risk, risk sharing, betas, risk premium, state variables, arbitrage, discount factors, and others. This theoretical background enables the students to understand the driving forces in financial markets. The course is a survey on theoretical asset pricing, and it is organized around a unifying stochastic discount-factor framework. The course also contains a review of recent empirical work on return predictability and the value and other puzzles in cross section for instance.

Content - Key areas:
  • Consumption-based models
  • Contingent claims markets
  • The discount factor
  • State-space representation of the discount factor
  • Mean-variance frontier and beta representations
  • Relation between the discount factors, betas, and mean-variance frontiers
  • Conditioning information
  • Factor-pricing models
  • Empirical puzzles
  • Return predictability

Goals description (SOLO taxonomy):
To fulfill the purposes of the course the student must be able to:

Demonstrate knowledge about the course’s focus areas enabling the student to:
  • Explain and interpret the stochastic discount factor framework to asset pricing.
  • Explain and interpret the state-space representation to analyze payoffs and their relationships with the stochastic discount factor.
  • Describe, interpret, and compare general models of financial asset prices formulated in one-period, in discrete-time, and in continuous-time diffusion type frameworks.
  • Describe and explain the concepts of no arbitrage, redundant assets, and complete markets.
  • Describe the concept of state prices, explain and evaluate their main properties and implications for asset pricing.
  • Describe, compare, and evaluate typical representations of individual preferences in financial models.
  • Describe typical models of individuals' consumption and portfolio choice problems, explain how such problems can be solved and what the consequences are for financial asset prices.
  • Describe and explain the concepts of efficient risk-sharing, Pareto efficiency, representative agents, and market completeness.
  • Explain how various versions of the consumption-based CAPM can be derived.
  • Explain and analyze typical asset pricing puzzles.
  • Describe the concept of pricing factors and relate them to state prices.
  • Describe and analyze various concrete factor pricing models, including various versions of the intertemporal CAPM and the Fama/French model.
  • Explain and evaluate the concepts of risk, risk premium, and arbitrage.

Demonstrate skills such that the student can:
  • Apply the stochastic discount factor framework to asset pricing.
  • Apply the state-space representation to analyze payoffs and their relationships with the stochastic discount factor.
  • Compare general models of financial asset prices formulated in one-period, in discrete-time, and in continuous-time diffusion type frameworks.
  • Apply the concepts of no arbitrage, redundant assets, and complete markets.
  • Apply the concept of state prices  to explain and evaluate their main properties and implications for asset pricing.
  • Evaluate typical representations of individual preferences in financial models.
  • Apply typical models of individuals' consumption and portfolio choice problems.
  • Apply the concepts of efficient risk-sharing, Pareto efficiency, representative agents, and market completeness in asset pricing.
  • Derive various versions of the consumption-based CAPM.
  • Replicate the typical empirical asset pricing puzzles.
  • Use pricing factors and relate them to state prices.
  • Apply various concrete factor pricing models, including various versions of the intertemporal CAPM and the Fama/French model.
  • Apply the concepts of risk, risk premium, and arbitrage to asset pricing.

Demonstrate competences, such that the student is able to:
  • Identify theoretical or practical applications on which the knowledge and skills obtained above can be applied independently.
  • Apply the knowledge and skills obtained above in an interdisciplinary application (e.g., with econometrics or accounting).
  • Use the above knowledge and skills to participate in team work so that the student obtains competences in collaboration and communication.

Literature:
The following literature, for example, is used as a starting point at the course:
Cochrane, John H.: 'Asset Pricing', Princeton University Press (newest version).
Other articles and lecture notes.

Time of classes:
Spring.

Scheduled classes:
2x2 hours weekly.
A total of 46 hours of lectures during a 15 week period.

Form of instruction:
In addition to scheduled lectures, there is project work in intervening weeks of the semester.  
The students' workload is expected to be distributed as follows:
Lectures - 46 hours
Preparation, lectures - 139 hours
Assignments - 80 hours
Written examination - 5 hours
Total 270 hours.

Time of examination:
Ordinary exam in June and re-exam in August.

Registration for the course is automatically a registration for the ordinary examination in the course. Cancellation is not possible. If the student does not participate in the examination, the student will use an examination attempt.
The university may grant an exemption from the rules in case of exceptional circumstances.

Examination form at the re-exam can be changed.

Examination conditions:
Examination in this course is not allowed if the student has passed the following course:
Asset Pricing (course no. 9221802/9263002/9851602/8031902).

Form of examination for the certificate:
The evaluation of the course has two elements (one grade is given):
1. Two assignments.
2. Written examination.

Supplemental information for the form of examination:
1. Two assignments.
Must be solved in groups of 2-3 students unless the instructor explicitly grants an exemption from this rule.
It must be clearly stated who is responsible for which part in order to make an individual assessment.

Duration: Date for submission will appear from the examination plan.
Location: Home assignment.
Internet Access: Necessary.
Hand Out: Course page in Blackboard.
Hand In: Via SDUassignment in the course page in Blackboard.
Extent: No limitations.
Exam Aids: All exam aids allowed.

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2. Written examination.  
Duration: 5 hours.
Location: Examination room at the university. Examination takes place using student's own computer being able to acces the university wireless network.
Internet Access: Necessary.
Hand Out: In the examination room.
Hand In: Via SDUassignment in the course page in Blackboard.
Extent: No limitations.
Exam Aids: All exam aids allowed. However, it is not allowed to communicate with anybody.

Programmes:
cand.oecon. Finance and Economics
Spring Semester, mandatory. Offered in: Odense
cand.merc. Accounting and Finance
Spring Semester, mandatory. Offered in: Odense
cand.oecon. Macroeconomics: Growth and Fluctuations
Spring Semester, Not chosen, elective subject. Offered in: Odense