Asset Pricing, Part 2

This course is part two of an introduction to graduate-level academic asset pricing. This second part uses the theory and elaborates empirical understanding. It shows some classic applications including the Fama-French three factor model, consumption and the equity premium, and extends the theory to cover options, bonds, and portfolios.

About The Course

Are you curious about quantitative academic finance? Have you considered graduate study in finance? Are you working in an investment bank, money-management firm or hedge fund and you want to understand models better? Would you like to know what buzzwords like beta, risk premium, risk-neutral price, arbitrage, equity premium, and discount factor mean? This class is for you. 

We will see how one basic idea, price equals expected discounted payoff, unites everything - models that describe stocks, bonds, options, real investments, discrete time, continuous time, asset pricing, portfolio theory, and so forth. 

This second part builds on what we studied in Asset Pricing, Part I. First, we see classic factor pricing models in action, first by studying the Fama French model and then by studying the question whether portfolio managers have skill or not. We’ll look in depth at the time-series predictability of returns, “bubbles,” and volatility. We’ll extend the theory to cover options, then bonds, and study the facts about the term structure of interest rates. The course closes with portfolio theory, how should investors structure their investment portfolios. 

The math in real, academic,  finance is not actually that hard. Understanding how to use the equations, and see what they really mean about the world... that's hard, and that's what I hope will be uniquely rewarding about this class.

Frequently Asked Questions

  • Will I need to purchase anything to succeed in this course?
    We recommend purchasing the textbook Asset Pricing, but you can complete the class without it. Some of the readings will require a free myJSTOR account (see jstor.org for more information).
  • What resources will I need for this class?
    Time, a computer with a good internet connection, some programming language, and curiosity. 
  • Do I need to be a finance professional to benefit from this class?
    No. The course is directed at doing and understanding academic research as much as understanding the underpinnings of industry models. 
  • Do I need a background in finance?
    You should know what a stock and bond are, but an extensive knowledge of finance is not necessary. Those who bring previous experience will enjoy seeing familiar concepts united and brought to a deeper level. Please see the section on Recommended Background above for information on the mathematical and economic prerequisites of the class.

Recommended Background

This course uses concepts from finance, undergraduate applied mathematics, advanced undergraduate / beginning graduate level economics, and time-series econometrics. You should be able to use single and multivariable calculus, simple differential equations, matrix algebra, and basic statistics. You should be able to program simple simulations in a matrix programming language like Matlab, Octave, R, Python, etc. You should have some background in economics, including utility functions and maximization, and have worked with basic time-series econometrics, such as AR(1) models.