Asset Pricing, Part 1

This course is part one of an introductory survey of graduate-level academic asset pricing. We will focus on building the intuition and deep understanding of how the theory works, how to use it, and how to connect it to empirical facts.

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, 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.

We'll start with the underlying consumption-based model, and we’ll preview the classic issues in finance. We’ll think about asset pricing in a simple economic equilibrium. Then, we'll take a step back and study contingent claims and the theorems showing the existence of a discount factor (the m in p=E(mx)). We'll explore the mean-variance frontier and expected return vs. beta models and factor structures. A brief tour of current facts and puzzles follows. Then, off to study options and the Black-Scholes formula, bond pricing models and facts. We will close with modern portfolio theory.

The math in real 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.

• Will I earn a Statement of Accomplishment for this course?
Yes, we plan to offer a Statement of Accomplishment to those students who complete the course at a satisfactory level.
• 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. Students should be able to use single and multivariable calculus, simple differential equations, matrix algebra, and basic statistics. They should be able to program simple simulations in a matrix programming language like Matlab, Octave, R, Python, etc. Students should have some background in economics, including utility functions and maximization, and have worked with basic time-series econometrics, such as AR(1) models.