Foundations of Financial Economics: 2019-2020

Organization

Instructor: Paulo Brito
Schedule: Fridays (between February 21st and May 22nd) 18h-21h
Room: 118 (F1)
Office hours: Fridays (between February 21st and May 22nd) 11-12h (upon confirmation).
Assessment: written exam

Overview

This is an introductory course on general equilibrium asset pricing theory.

It aims to provide foundations about:

asset pricing determination in general equilibrium models;
in deterministic and stochastic settings;
in simultaneous and sequential economies;
from simple two-period to multi-period models.

Introductory results on the tools needed (v.g., calculus, optimization, probability) will be provided along the way.

Program

Introduction
Basic utility theory
Two-period deterministic general equilibrium (DGE) and asset pricing:
Contingent goods and choice under uncertainty
Two period stochastic general equilibrium (SGE) in exchange Arrow-Debreu economies:
1. Introduction
2. Exchange Arrow-Debreu economies
Two period stochastic general equilibrium (SGE) and asset pricing in exchange finance economies:
1. Financial markets and the arbitrage pricing theory
2. DGSE for a finance economy
Two period SGE models: extensions
1. Production economies
2. Heterogeneous-agent economies
3. Financial frictions: Limited participation ; Moral hazard
Multi-period period DSGE:
1. Introduction to stochastic processes
2. Finance economies

References

Books

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[Altug and Labadie(2008)] Sumru Altug and Pamela Labadie. Asset pricing for dynamic economies. Cambridge University Press, 2008.

[Bikhchandani et al.(2013)Bikhchandani, Hirshleifer, and Riley] Sushil Bikhchandani, Jack Hirshleifer, and John G. Riley. The analytics of uncertainty and Information. Cambrdge University Press, 2nd edition, 2013.

[Lengwiler(2004)] Yvan Lengwiler. Microfoundations of Financial Economics. Princeton Series in Finance. Princeton University Press, 2004.

[LeRoy and Werner(2014)] Stephen F. LeRoy and Jan Werner. Principles of Financial Economics. Cambridge University Press, Cambridge and New York, second edition, 2014.

[Ljungqvist and Sargent(2018)] Lars Ljungqvist and Thomas J. Sargent. Recursive Macroeconomic Theory. MIT Press, Cambridge and London, 4th edition, 2018.

Financial history: very long run

Financial history: shorter-run

Other data

Policy uncertainty around the world

Course material: current year

Problem sets

Solutions

Problem sets 1 to 5

Course material: previous years

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Posted in May 15, 2020