Course description
The course introduces different approaches towards modeling the process of a financial asset price discovery in financial markets. The students will learn how investors’ characteristics — their risk perception and demand for stable or for exceptionally high return — influence equilibrium price formation, and why many models rely on representative investors. The students will study discrete modeling of financial assets’ prices in one or several periods, and will learn how to use continuous time models based on stochastic processes. The students will master navigation in risk-return dimensions and the art of choosing an optimal portfolio in the basis of assets’ characteristics and investor’s risk aversion. The students will also understand how derivatives’ prices are modeled and realize why one of the reasons of 2008 financial crisis was a wrong estimation of default probabilities on a number of such contracts.
Topics
- One-period models
- Dynamic (multi-period) models
- Derivatives
- Additional topics
Literature
- Back K. Asset Pricing and Portfolio Choice Theory. Oxford; New York: Oxford University Press USA, 2010.
- Cochrane J. Asset Pricing. Princeton: Princeton University Press, 2005.
- Duffie D. Dynamic Asset Pricing Theory. Princeton: Princeton University Press, 2005.
- Duffie D. Dark Markets: Asset Pricing and Information Transmission in Over-the-Counter Markets. Princeton: Princeton University Press, 2012.