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NES,
Winter 2001
nstructor:
Galina
Ovtcharova
TA:
Konstantin Styrin
OFFICE
HOURS: I have an open-door policy unless there is a
“DND” sign on my door
HANDOUTS: You
will need lecture handouts (when available) during the lectures.
Unless otherwise noted, the handouts will be distributed in
class. Please, put your signature in a box for an appropriate
lecture number on a sign-up sheet each time you receive lecture
handouts. Leftover handouts will be in the library.
Occasionally
you will need separate chapters from Cochrane’s “Asset pricing”
(available in the library) during a lecture. You will be told
about it during the preceding lecture.
GRADES: 70%
- final exam, 30% - homework assignments
HOMEWORK: There
will be 5 (most likely) or 6 assignments. They will be due
on Tuesdays in class. Late submissions will not be accepted
except for emergency reasons explained directly to me. You
are welcome to discuss assigned problems with your classmates,
but you must write them down yourself. In order to encourage
this kind of behavior, the following measures will be taken:
First,
problems from the assignments (most likely, the most difficult
ones) will be on the final exam. You will not have enough
time to solve them unless you know in advance how to do it.
Second, grades for exact copies of homework assignments will
be divided by the number of these copies. Third, a homework
problem will get a full credit (even if the right answer is
not obtained) if I see that you worked a lot on this problem
and thought about it enough. If you don’t know how to solve
a problem, describe how it is related to the lecture material,
what is not clear to you and what additional information you
think you would need to obtain a solution.
EVIEW
SESSIONS: Review sessions will be held by Konstantin
Styrin each week when a homework assignment is due - after
the due date of the assignment. The exact time and place will
be announced later.EXAM: There is no midterm exam.
The final exam will be held with closed books and notes, with
the exception of one sheet (format A4). You can write anything
you like on both sides of the sheet.
Course
outline
(To be revised)
Introduction
Different
approaches to asset pricing. Rational and behavioral approaches.
Absolute and relative pricing.
Discount
factor
Contingent
claims. The law of one price and the existence of a stochastic
discount factor. No-arbitrage and positive discount factor.
Basic
pricing equation.
Preference-free
approach (purely relative pricing)
Arbitrage
pricing: general idea and example (Option).
Preference-dependent
theories
Theory
of choice – expected utility and risk aversion – brief overview.
Consumption-based
asset pricing models.
Models
with power utility. Equity premium puzzle. Hansen-Jagannathan
bounds. Resolutions: different utility functions, general
equilibrium models, factor pricing models – brief overview.
Portfolio
theory basics
Portfolio
return.
The risk
of a security in a portfolio.
Portfolio
risk.
Diversification.
Mean-variance
frontier and beta representation
Mean-variance
portfolio choice.
Efficient
frontier. The linearity of returns with respect to efficient
portfolios.
Sharpe
ratio and “Good deal” bounds.
Relation
to the basic pricing equation and beta representation. Discount
factor vs. mean, var. and beta. Relation of Hansen-Jagannathan
bound to mean-variance frontier.
Capital
asset pricing model (CAPM)
Market
equilibrium and CAPM. The relation of CAPM to consumption-based
models.
Incomplete
markets and heterogeneous consumers.
Multifactor
models
APT
ICAPM
Empirical
issues
Empirical
problems with CAPM, Roll’s critique.
Factor
selection in multifactor models. Chen. Roll and Ross factors.
Fama-French three-factor model.
Market
efficiency and asset pricing anomalies. Characteristics versus
covariances.
Return
predictability: D/P ratio and term premium; momentum (short-term
persistence) and long-term reversal.
Event
studies.
Value-relevant
corporate decisions – facts and their explanation
Capital
structure decisions
Dividend
policy
Share
issues and repurchases
Investment
decisions
Behavioral
finance
Underreaction
and overreaction. A model of investor sentiment.
"Bubbles".
“Bounded
rationality and “noise trading”.
The psychology
of decision making under uncertainty. Heuristics and biases.
Prospect theory and loss aversion (basics).
Limits
of arbitrage.
The role
of regulations in fin. markets.
Readings:
Books:
(The abbreviation
before the book title will be used during the lectures as a
reference to a particular book. If for some book only the name
of the author and publication date are given, see the reference
in CLM)
AP:
J. Cochrane “Asset pricing”, manuscript (selected chapters)
– required reading, available in the library.
CLM:
J.Y. Campbel, A.W. Lo, A.C. MacKinlay “The Econometrics of Financial
Markets”, Princeton University press, Princeton, 1997 – recommended,
available in the library. The book contains a comprehensive
reference list.
Finance:
R.A. Jarrow, V. Maksimovic, W.T.Ziemba (ed.) “Finance (Handbooks
in Operations Research and Management Science, vol.9)”, North
Holland, Amsterdam, 1995. A couple of selected chapters will
be required and will be distributed in class.
HL:
Huang and Litzenberger, 1988 – selected pages will be useful
as a reference.
FF:
E.F. Fama, “Foundations of Finance”, Basic Books, New York,
1976. Everything you need from this book will be in a handout.
BKM:
Z. Bodie, A. Kane, A.J. Marcus, “Investments”, Irwin, 1996.
Just a couple of examples from this book will be used. You don’t
need the book itself.
Selected
papers:
Required
papers will be distributed in class.
Recommended
papers will be available in the library.
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