Prof. Markus K. Brunnermeier Fin 501: Asset Pricing e-mail: [email protected] http://courseinfo.princeton.edu http://www.princeton.edu/~markus Room: 103 BCF (Dial Lodge) Office: 209 Dial Lodge Times: MW, 8:30 a.m. – 9:50 a.m. Office Hours: Mo 4:25-5:45 p.m. Fall 2009 FIN 501: Asset Pricing I Pricing Models and Derivatives Course Description: The aim of this course is to introduce students to the modern theory of asset pricing, portfolio theory and derivatives pricing. Topics covered include (i) no-arbitrage, Arrow-Debreu prices, and equivalent martingale measures, (ii) security structure and market completeness, (iii) mean-variance analysis, Beta pricing, CAPM, and (iv) derivatives pricing. The course is designed for Master in Finance students, but is also open to undergraduate and Ph.D. students. Textbooks: There is no ideal textbook for this Masters’ course. A less technical introduction to the course can be found in Danthine and Donaldson [D], (2004), “Intermediate Financial Theory”, 2nd edition, Elsevier (optional). You might also want to consult Yvan Lengwiler, [Y] (2004), “Microfoundations of Financial Economics: An Introduction to General Equilibrium Asset Pricing”, Princeton University Press As the title suggests, this books takes a general equilibrium perspective and is less “financy.” It puts less emphasis on CAPM, APT and market efficiency. It provides very good illustration of state prices and the expected utility framework. The book Stephen F. LeRoy and Jan Werner [L], (2001), “Principles of Financial Economics”, Cambridge University Press (optional). provides a more formal treatment of the material of the first part of the course and follows the same structure. Another book I recommend is George Pennacchi (2007), “Principles of Financial Economics”, Addison Wesley.The elements of the course that focuses on derivative pricing and is based on Robert L. McDonald [McD], (2005), “Derivatives Markets”, 2nd edition, Addison Wesley. An alternative book to McDonald (2005) is John C. Hull [H], (2008), “Options, Futures and Other Derivatives”, 7th edition, Prentice Hall (optional). The following book is useful for both parts of the course, but it puts more emphasis on dynamic modeling. Jakša Cvitanić and Fernando Zapatero [CZ], (2004), “Introduction to the Economics and Mathematics of Financial Markets”, MIT Press (optional). Structure of the Course: The relevant chapters of the books are indicated in brackets, e.g. [L3] refers to chapter 3 of LeRoy and Werner book. 1. Role of Financial Markets – Empirical Regularities PART I: One-Period Models 2. Setup [L3, Y2,3] - Security structure and market, Options, Forwards, Futures, Swaps [H1-6,McD1-8, CZ1-2] - LoOP, No Arbitrage - Basics of Option Pricing 3. The four Pricing Formulas: - Arrow-Debreu (State) Prices/Stochastic Discount Factor/Martingale Pricing - Single Factor State-price Beta Model 4. Risk Measures and Preferences - Stochastic Dominance, Expected Utility, Portfolio Choice [Y4, L8,9,11,12, LY4] - Optimality, Representative Agent Analysis - Sharpe Ratio Bounds, Equity Premium Puzzle [L14.4] 5. Mean Variance Analysis, Beta-Pricing, CAPM [L17-19], [D4, 5.2-5.5, 6, CZ5.1,13.1-13.2] PART II: Multi-period Models 6. Setup [Y6, L21-28] - Filtration, Event Prices - Dynamic Market Completeness - Risk Neutral Valuation - Ponzi Schemes - “Rational Bubbles” 7. Fixed Income, Futures, Swaps8. Option Pricing - Black-Scholes Option Pricing Formula [H7-10,McD9-13] 9. Equilibrium Models: ICAPM, Hedging Demand 10. Funding Liquidity Risk, collateral pricing, violation of LoOP 11. Multiple Factor Pricing Models (APT, FF) [L20, CZ14] - Conditional versus unconditional beta 12. Market Efficiency – Asymmetric Information and Frictions Course material: Additional course material (if necessary) will be made available on the course website <http://www.princeton.edu/~markus/teaching/Fin501/Teaching_Fin501.htm> after classes. All students who are registered for this class will also have access to Princeton’s blackboard webpage. Preceptor: Preceptor: Wei Cui Office: Dial Lodge 303C e-mail: [email protected] website: http://www.princeton.edu/~weicui - The preceptor’s job is to act as a catalytic in that process. Please o Ask him when something is not clear – if you did not understand something, the odds are that somebody else did not either o Give me unsolicited, honest, direct feedback on how he can do a better job. Any medium of communication is good. Anonymous posts can be made via blackboard, or you can drop a note in my mailbox in Fisher Hall 001. I will respond to your suggestions in the next class. Assignments and Precepts: Time and place of the precepts are to be determined in the first lecture. Please communicate to him your availability through the ‘whenisgood.org’ link he sent you on Monday, September 19, 2011. The purpose of the homework assignments and precepts is to help you better understand the rather abstract material from the lectures. To that end, careful preparation of the precepts as well as the lectures will help you a lot. Moreover, it is only possible to grasp the concepts by thinking through concrete examples by yourself. Many students find it helpful to discuss the problems with their peers. To align your incentives with these goals, and to give you a commitment device… - Collaboration is explicitly allowed and desirable. Help each other prepare for the precepts, make stuff available to each other, and discuss your solutions. - Use the Blackboard Discussion Board to discuss problems before emailing me. I will look into it and give comments if needed. - You have the choice between submitting a written homework assignment or being ready … You do not have to turn in written homework, unless otherwise. Instead, you will be responsible to pick a total of >80% of the problems over the term andbe ready to individually present your solutions to the precept class. Your performance (not your presentation skills) and participation in the discussion will be graded. Furthermore, he will answer questions of general concern and respond to feedback in the precepts. Do not hesitate to email him your questions in