Asset Pricing Course

II Term January - March

Asset pricing (Prof. Lorenzo Pandolfi - Prof. Giovanni W. Puopolo)

Functions of financial markets. Model of consumption and investment choice in autarchy and with perfect financial markets: Fisher’s separation theorem. Consumption and investment with imperfect financial markets. Choices under risk: expected utility, attitudes to risk, risk premium, HARA utility, comparing risk (first order stochastic dominance, second order stochastic dominance). Intertemporal choice under uncertainty and asset pricing: introduction. Contingent claims markets: law of one price, arbitrage, complete markets and state prices, relation between state prices and asset prices, equilibrium state prices, risk neutral probabilities. Mean-variance analysis: efficient frontier with N risky assets, two-fund separation theorem, tangency portfolio, market equilibrium (CAPM) without and with a riskless asset, extensions of the static CAPM. Consumption-based asset pricing: Merton’s intertemporal CAPM, Lucas model, equity premium puzzle. Empirical evidence: testing the CAPM and the CCAPM. Bond pricing and term structure of interest rates. Market efficiency and investor rationality.

Bibliography:

John H. Cochrane, "Asset Pricing", Princeton University Press;
Jean-Pierre Danthine and John B. Donaldson, "Intermediate Financial Theory", Prentice Hall 2002