Asset Pricing

General information

Type:	OP	Curs:	1	Period:	S semester
ECTS Credits:	3 ECTS

Teaching Staff:

Group	Teacher	Department	Language
Ed: 1	Carlo Sala	Economía, Finanzas y Contabilidad	ENG

Group	Teacher	Department	Language
Ed: 2	Carlo Sala	Economía, Finanzas y Contabilidad	ENG

Prerequisites

Foundation of Financial Economics, Basic Econometrics.

Previous Knowledge

Principles of Finance, Basic Econometrics, Knowledge of Matlab and Excel

Workload distribution

Lecture 60%
Independent work 40%

Course Learning Objectives

Understanding asset price dynamics and the importance of pricing factors.
Introduction to forecasting and equity return predictability.
Market efficiency and how to invest in an efficiently inefficient market.
Portfolio analysis and the cross section of equity returns.
Rational and behavioral finance.

Competences

9. Adaptability, flexibility

9. Adaptability, flexibility

CONTENT

1. Review of the basic equilibrium pricing models We will start the course by providing necessary theoretical tools in order to understand how equity is 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 bounds. Some empirical facts on risk-free rate behavior 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 present and test the Sum of the Part forecasting method and propose an out of sample test to rank competing forecasting models. Finally we will study the main differences between fundamental and technical analysis and test their forecasting performances. Keywords: time series regression, forecasting methods, dividend yield model, Campbell and Shiller present value decomposition, sum of the part method (SOP), out of the sample test, technical analysis.
3. Efficiently inefficient markets
4. Behavioral Finance

1. Review of the basic equilibrium pricing models

We will start the course by providing necessary theoretical tools in order to understand how equity is 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 bounds. Some empirical facts on risk-free rate behavior 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 present and test the Sum of the Part forecasting method and propose an out of sample test to rank competing forecasting models. Finally we will study the main differences between fundamental and technical analysis and test their forecasting performances.

Keywords: time series regression, forecasting methods, dividend yield model, Campbell and Shiller present value decomposition, sum of the part method (SOP), out of the sample test, technical analysis.

3. Efficiently inefficient markets

4. Behavioral Finance

Methodology

The teaching methodology is a mix of theory and real world examples (cases, readings and similar)

ASSESSMENT

ASSESSMENT BREAKDOWN

Description	%
Group Assignment	35
Final Exam	50
Weekly Presentation	15

Assessment criteria

The Final Valuation is determined as follows:
15% Weekly Presentation
35% Group Assignment
50% Final Exam

Important clarifications:

1. To pass the course, a minimum grade of 4 is required on the final exam. If the final exam grade is >4, then the final grade is the weighted average of the three components of the grade:
Final = (0.4*final exam) + (0.15*group presentation) + (0.35*group assignment)

2. In case a retake exam is needed, the grade will be 100% determined by the retake exam grade.

Bibliography

Basic Bibliography:

John Cochrane, Asset Pricing

George Pennacchi, Theory of Asset Pricing

Lesse Pedersen, Efficiently Inefficient

Additional Bibliography or Materials:

Additional material, lecture notes and financial data will be given in class.

Timetable and sections

Group	Teacher	Department
Ed: 1	Carlo Sala	Economía, Finanzas y Contabilidad

Timetable Ed: 1

From 2019/2/8 to 2019/4/12:
Each Friday from 9:00 to 12:00. (Except: 2019/4/5)

Friday 2019/7/26 from 9:00 to 12:00.

Group	Teacher	Department
Ed: 2	Carlo Sala	Economía, Finanzas y Contabilidad

Timetable Ed: 2

From 2019/2/8 to 2019/3/29:
Each Friday from 14:00 to 17:00.

Friday 2019/4/12 from 9:00 to 12:00.

Asset Pricing (CF35848)