EC824 Financial Economics of Asset Pricing
Katsuyuki Shibayama
Office Location: B1.02, Keynes
Ext: (01227 82) 4714
Email: K.Shihayama@kent.ac.uk
Monday 14:30-15:30 & Thursday 14:30-15:30 (No appointment is required for office hours)
Introduction
The module will develop students’ skills in asset pricing and understanding of their theoretical basis. The module stresses practical training in asset pricing.
The two main topics in the module are investors’ utility maximisation and arbitrage theory in derivative pricing (see Module Outline below for details). The module discusses the arbitrage theory in both discrete and continuous time models, and also briefly discusses the applications of option theory to business and real life situations.
Although the module is mathematically challenging for most students, its aim is to offer practical training. Indeed, the module puts stress on the intuitions and heuristics behind theorems and formulae, rather than their rigorous derivations and semantic definitions. Moreover, students are not only expected to understand theories but also expected to master how to use them.
Topics
- Investors’ Optimisation
- Dynamic Optimisationn
- Tobin’s Simplified Model
- Risk Aversion
- Precautionary Saving
- Equity Premium Puzzle
- Discrete Time Models
- One Period Model
- Multi-Period Model
- Real Options
- Continuous Time Models (if time allows)
- Ito Calculus
- Risk Neutral Pricing
- Option Pricing by Directly Solving the Diffusion Equation
Reading
Main textbook
No single textbook covers all lecture contents, but the most useful one is Hull (2006). The module provides the lecture notes, which are based on the following textbooks and articles.
For investors’ optimization (C-CAPM)
- Chi-fu Huang and Robert H. Litzenberger (1988) Foundations for Financial Economics, Prentice Hall.
- John Y. Campbell, Andrew W. Lo and A. Craig MacKinlay (1997) The Econometrics of Financial Markets, Princeton University Press
- John H. Cochrane (2001) Asset Pricing, Princeton University Press
- Christopher D. Carroll and Miles S. Kimball (2006) Precautionary Saving and Precautionary Wealth, working paper, available at http://www-personal.umich.edu/~mkimball/pdf/PalgravePrecautionary.pdf
- James Tobin (1958) Liquidity Preferences as Behaviour Towards Risk, Review of Economic Studies, available at http://cowles.econ.yale.edu/P/cp/p01a/p0118.pdf
- Narayana R. Kocherlakota (1996) The Equity Premium: It’s Still a Puzzle Journal of Economic Literature, available at
http://www.econ.ucdavis.edu/faculty/kdsalyer/LECTURES/Ecn200e/Kocherla.pdf
For risk neutral pricing in discrete time
- Stanley R. Pliska (1997) Introduction to Mathematical Finance – Discrete time Models, Blackwell Publishers Inc.
For risk neutral pricing in continuous time
- Martin Baxter and Andrew Rennie (1996) Financial Calculus – An introduction to derivative pricing, Cambridge University Press.
- Tomas Bjork (2004) Arbitrage Theory in Continuous Time, Oxford University Press.
For practical aspects of derivatives and market conventions
- Frank K. Reilly and Keith C. Brown (2005) Investment Analysis and Portfolio Management, 7th ed., Dryden Press.
- John C. Hull (2006) Options, Futures, and Other Derivatives, 6th ed., Prentice Hall.
For real options - Avinash K. Dixit and Robert S. Pindyck (1994) Investment Under Uncertainty, Princeton University Press.
Also, the following textbooks are also useful
- John Y. Campbell and Luis M. Viceira (2002) Strategic Asset Allocation – Portfolio Choice for Long-Term Investors, Oxford University Press.
Download the EC824 Module Outline here: