As­set Pri­cing

Course content

Asset pricing theory is the subject of uncertain cash flow valuation in terms of risk adjustments. Empirical work typically infers these risk adjustments, imbedded in low average prices, from high average returns. For example, the equity risk premium inferred from time-series evidence on returns suggests an adjustment that is an order of magnitude too large to be rationalised by neoclassical theory. Return anomalies are also pervasive in the cross-section of assets as evidenced by a vast literature that rejects the Capital Asset Pricing Model in favour of a multiple priced risk factors. 

This course provides a first principles account of discrete time asset pricing theory. The course begins by discussing how to represent investor preferences. The utility function representation of preferences is then applied to a host of optimal portfolio choice problems in a single period setting. The stochastic discount factor approach to asset pricing is introduced. We then turn to dynamic models of asset pricing where we discuss classic asset pricing anomalies in the context of consumption based models. We introduce some well studied solutions to these anomalies including the introduction of Epstein-Zin preferences, ambiguity aversion and habit formation. Finally, we discuss production based models and talk about intertemporal risk.

The syllabus is both exciting and extensive covering:

•    Choice Under Uncertainty, Utility Functions, and Risk Aversion
•    Static Portfolio Choice
•    The Capital Asset Pricing Model and Multi-Factor Models
•    The Stochastic Discount Factor, State Pricing and Risk Neutral Probabilities
•    Present Value Relations

•    Consumption Based Models
•    Production Based Models
•    Intertemporal Risk