Foundations of Financial Economics: 2020-2021

Organization

Instructor: Paulo Brito
Schedule: Fridays (between February 19th and May 14th) 18h-21h
Rules: Regulation at ISEG
Assessment: written exam. The type of exam will depend on how the pandemics evolve: it will be a closed book exam if presencial and an open book exam if done online.

Overview

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

It aims to provide foundations on:

the microeconomics of intertemporal choice in deterministic and stochastic settings;
asset pricing determination in general equilibrium models, in deterministic and stochastic settings;
asset pricing determination from simultaneous to sequential economies;
introduction to advanced topics in macrofinance: role of inequality and financial frictions.

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

Program

Introduction
Basic utility theory
Deterministic GE (two-period) and asset pricing
Contingent goods and choice under uncertainty
Two period stochastic general equilibrium (SGE) in exchange Arrow-Debreu economies:
1. Environment, contracts, markets and models
2. Arrow-Debreu equilibrium for an exchange economy
Financial markets and the arbitrage pricing theory
Two period stochastic general equilibrium (SGE) and asset pricing in exchange finance economies:
Two period SGE models: extensions
1. Production economies
2. Heterogeneous agents
3. Limited participation
4. Moral hazard
Multi-period period DSGE:
1. Introduction to stochastic processes
2. AD economies
3. Finance economies

Topic	Slides	Problem sets	Other material


1	Introduction
2	Basic utility theory	Problem set 1
3	Deterministic GE	Problem set 2
4	Contingent goods and choice under uncertainty	Problem set 3	R script for problem 9
5 a	Two-period DSGE: introduction
5 b	Exchange Arrow-Debreu economies	Problem set 4: two-period AD
6	Financial markets and the arbitrage pricing theory	Problem set 5
7	DGSE for a finance economy	Problem set 6: two-period FE
8.a	Production economies	Problem set 7: production
8.b	Heterogeneous-agent economies	Problem set 8: heterogeneity
8 c	Limited participation
8 d	Moral hazard

9 a	Introduction to stochastic processes
9 b	Arrow-Debreu economies	Problem set 9: multiperiod
9 c	Finance economies

Disclaimer: the slides, the problem sets and some solutions will be provided before the class but can be modified afterwards. The final version will be posted before the 21st May. Please check the date of document. You can find last year’s version is here

References

Some references

Course notes: Brito (2014)
Closer to this course: [Lengwiler(2004)], [LeRoy and Werner(2014)];
On the economics of uncertainty and information: [Bikhchandani et al.(2013)Bikhchandani, Hirshleifer, and Riley];
Contains most topics of this course, but at a more advanced level: [Altug and Labadie(2008)];
Some of the topics of the course, for those wondering what the research frontier looks like: [Ljungqvist and Sargent(2018)];

[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

Data

Exams exams

2017/18 EN , 2017/18 ER 2017/18 EN , 2019/20 EN 1 , 2019/20 EN 2 , 2019/20 ER 1 , 2019/20 ER 2 ,

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Posted in May 7, 2021