Syllabus for Financial Economics [8705], Fall 2016

This course will cover recent topics in macro asset pricing

 

Foundations

What we can we learn about the investors' preferences, beliefs or incomes from asset pricing data ? The spirit of the material is to see how much can we say without imposing too much structure on either of these primitives.

  1. Existence and properties of sdf's

    • If pricing functionals are linear, there exists a unique sdf in the payoff space.

    • No arbritage is necessary and sufficient for existence of a strictly positive sdf

    • Optimality of investors is equivalent to no arbitrage

  2. Restrictions on moments of sdf from asset market data

    • Hansen Jagganthan Bounds

    • Duality between mean variance frontiers for sdfs and returns

  3. Restrictions on beliefs from asset market data

    • Perron Frobenius

  4. Restrictions on income processes from asset market data

    • Existence of equilibria with incomplete markets that generate valuations consistent with any sdf

References

  • Duffie (2001) Chapter 1

  • Cochrane (2005) Chapter 3 and 4

  • Hansen, Lars P., and Ravi Jagannathan. "Implications of security market data for models of dynamic economies." (1990).

  • Hansen, Lars Peter, and Scott F. Richard. "The role of conditioning information in deducing testable restrictions implied by dynamic asset pricing models." Econometrica: Journal of the Econometric Society (1987): 587-613.

  • George M. Constantinides and Darrell Duffie. ``Asset Pricing with Heterogeneous Consumers''.Journal of Political Economy Vol. 104, No. 2 (Apr., 1996), pp. 219-240

  • Borovicka et all “Misspecified Recovery.” Mimeo.

Consumption based asset pricing models

  • Empirical asset pricing puzzles

  • Standard macro asset pricing theories: Lucas-Breeden, Habits, Disaster, Epstein Zin, Robustnes

  • Production, adjustment costs

References

  • Lucas, Robert E. (1978): “Asset Prices in an Exchange Economy,” Econometrica

  • Campbell, John Y., and John H. Cochrane. "By force of habit: A consumption-based explanation of aggregate stock market behavior." Journal of political Economy

  • Kreps, David M., and Evan L. Porteus. "Temporal resolution of uncertainty and dynamic choice theory." Econometrica

  • Epstein, Larry G., and Stanley E. Zin. "Substitution, risk aversion, and the temporal behavior of consumption and asset returns: A theoretical framework." Econometrica

  • Bansal, Ravi, and Amir Yaron. "Risks for the long run: A potential resolution of asset pricing puzzles." The Journal of Finance

  • Cochrane, J. H. (1991), Production‐Based Asset Pricing and the Link Between Stock Returns and Economic Fluctuations. The Journal of Finance, 46: 209-237. doi:10.1111/j.1540-6261.1991.tb03750.x

 

Asset pricing with Incomplete Markets

  • Constantinides, George M., and Darrell Duffie. "Asset pricing with heterogeneous consumers." Journal of Political economy 104.2 (1996): 219-240

  • When is market incompleteness irrelevant for the price of aggregate risk (and when is it not)? Journal of Economic theory

  • Alvarez, Fernando, and Urban J. Jermann. "Efficiency, equilibrium, and asset pricing with risk of default." Econometrica 68.4 (2000): 775-797.

  • Ai Hengjie, and Bhandari Anmol. "Asset Pricing with Endogenously Uninsurable Tail Risks"

References

Texts:

  • Duffie, Darrell (2001). Dynamic Asset Pricing Theory

  • Ljungqvist, Lars and Thomas J. Sargent (2012). Recursive Macroeconomic Theory

  • Cochrane, John (2005). Asset Pricing.

Papers: TBA