Asset Pricing

General information

Type:	OP	Curs:	5	Period:	S semester
ECTS Credits:	4 ECTS

Teaching Staff:

Group	Teacher	Department	Language
	Carlo Sala	Economía, Finanzas y Contabilidad	ENG

Prerequisites

Foundation of financial economics, basic econometrics. The course is quantitative so a high grade in quantitative core courses (e.g., Financial Economics) is advisable.

Previous Knowledge

Principles of finance, basic econometrics, linear algebra. The course requires the use of computers thus, general computer knowledge and the use of Microsoft Excel is necessary. Students will be exposed to the use of Bloomberg.

Workload distribution

Lecture 60%
Independent work 40%

Course Learning Objectives

Understanding asset prices dynamics and the importance of pricing factors. Introduction to forecasting and equity return predictability. Asset pricing simulation and derivatives pricing

CONTENT

1. Review of the basic equilibrium pricing models We will start the course by studying the necessary theoretical tools in order to understand how stocks are in general priced. We will theoretically link consumption to equity prices (consumption-based asset pricing models) and study the concepts of the stochastic discount factor, risk correction and equity return. Some empirical facts on the risk-free rate are tested. Finally, the connection between consumption based models and the capital asset pricing model is presented.
2. Return Predictability In this part of the course we will study how and in what extent equity returns are predictable. We will review and test the basic present value model and its extensions, the market efficiency hypotheses and the impact of different time horizons. We will also analyze how to take advantage from efficiently inefficient markets
3. Cross Section of Equity Return Introduction to derivatives products (Futures, forwards, options), their pricing in closed form (Black and Scholes), with binomial trees and computer simulation. Monte Carlo simulation and its use for basic and exotic options.

1. Review of the basic equilibrium pricing models

We will start the course by studying the necessary theoretical tools in order to understand how stocks are in general priced. We will theoretically link consumption to equity prices (consumption-based asset pricing models) and study the concepts of the stochastic discount factor, risk correction and equity return. Some empirical facts on the risk-free rate are tested. Finally, the connection between consumption based models and the capital asset pricing model is presented.

2. Return Predictability

In this part of the course we will study how and in what extent equity returns are predictable. We will review and test the basic present value model and its extensions, the market efficiency hypotheses and the impact of different time horizons.
We will also analyze how to take advantage from efficiently inefficient markets

3. Cross Section of Equity Return

Introduction to derivatives products (Futures, forwards, options), their pricing in closed form (Black and Scholes), with binomial trees and computer simulation. Monte Carlo simulation and its use for basic and exotic options.

Relation between Activities and Contents

	1	2	3
Mid Term Assignment
Final Exam

Methodology

The class is structured in two parts. The first part addresses the stochastic discount factor, return predictability and market efficiency. The second introduces the student to the basic of derivatives pricing

ASSESSMENT

ASSESSMENT BREAKDOWN

Description	%
Mid Term Assignment	40
Final Exam	60

Assessment criteria

The Final Valuation is determined as follows:
40% Class Assignment
20% Bloomberg certificate
20% Class presentation
20% Final Exam

Bibliography

Basic Bibliography:
John Cochrane, Asset Pricing
Hull, Options Futures and other derivatives

Additional Bibliography or Materials: Additional material, lecture notes and financial data will be given in class.

Timetable and sections

Group	Teacher	Department
	Carlo Sala	Economía, Finanzas y Contabilidad

Timetable

From 2019/1/21 to 2019/2/1:
From Monday to Friday from 17:00 to 20:00.

Asset Pricing (B60020)