Universidade Nova de Lisboa

Faculdade de Economia

Asset Pricing

Fall 2008

 

Prof. André C. Silva                      acsilva@fe.unl.pt                  Gabinete 334                                                                                  webpage

 

Classes: Tuesdays 6:30-8:00pm and Wednesdays 5-6:30pm, Room 308

 

This course focuses on the valuation of assets. We study investment decisions under risk and their implications for portfolio choice and asset prices. We use the intertemporal utility maximization model under uncertainty as a unifying approach. Some topics covered are the CAPM, the APT, the Consumption CAPM, the Epstein-Zin model, the equity premium puzzle, and models with conditioning information and time varying risk premia.

 

Syllabus

 

Announcements

Sep 8

The first class will be on September 10, Wednesday, 5-6:30pm, Room 308.

 

Evaluation: important dates

Referee Report: Nov 26, Wednesday

Paper Project: Dec 10, Wednesday

Final Exam: Dec 15, Monday, 17:00.

 

Problem Sets

Problem Set 1

Problem Set 2          Data: Mean Returns, Covariance Matrix, Asset Returns

Problem Set 3

Problem Set 4

Problem Set 5

Problem Set 6

Problem Set 7

Problem Set 8

 

Slides Class 1

 

Final Exam

 

References

Main reference: Cochrane, John H., Asset Pricing, revised Edition, Princeton University Press, 2005.

Campbell, John Y., Andrew W. Lo and A. Craig MacKinley, The Econometrics of Financial Markets, Princeton University Press, 1997. (CLM)

Campbell, John Y. and Luis M. Viceira, Strategic Asset Allocation: portfolio choice for long-term investor, Oxford University Press, 2002.

Duffie, Darrell, Dynamic Asset Pricing Theory, 3rd Ed, Princeton University Press, 2001.

Ingersoll, Jonathan E., Jr., Theory of Financial Decision Making, Rowman & Littlefield, 1987.

 

Course Outline and Reading List

1. The basic model: introduction and motivation

Cochrane chapters 1, 2.

CAPM review: CLM Ch 5, 181-188. Ingersoll Ch 4. Huang and Litzenberger Foundations for Financial Economics.

Campbell, John Y. (2000). “Asset pricing at the millennium.” The Journal of Finance 55(4): 1515-1567.

Cochrane, John (1999a). “New facts in finance.” FED Chicago Economic Perspectives 23(3).

Cochrane, John H., Francis A. Longstaff and Pedro Santa-Clara (forthcoming). “Two trees.” Review of Financial Studies.

Jagannathan, Ravi and Ellen R. McGrattan (1995). “The CAPM debate.” FED Minneapolis Quarterly Review 19(4): 2-17.

Lucas, Robert Jr. (1978). “Asset prices in an exchange economy.” Econometrica 46(6): 1429-1445.

 

2. Contingent assets. Risk sharing

Cochrane chapter 3.

Brandt, Michael W., John H. Cochrane and Pedro Santa-Clara (2006). “International risk sharing is better than you think, or exchange rates are too smooth.” Journal of Monetary Economics 53: 671-698.

 

3. Existence of a stochastic discounting factor. Law of one price. No arbitrage

Cochrane chapter 4. Ingersoll Ch 2.

Hansen, Lars P. and Scott Richard (1987). “The role of conditioning information in deducing testable restrictions implied by dynamic asset pricing models.” Econometrica 55: 587-613.

 

4. Mean-variance frontier and beta representations

Cochrane chapter 5.

Chen, Zhiwu and Peter J. Knez (1995). “Portfolio performance measurement: theory and applications.” Review of Financial Studies 9(2): 511-555.

Cochrane, John and Lars P. Hansen (1992). “Asset pricing explorations for macroeconomics.” In Olivier Blanchard and Stanley Fisher (eds.), NBER Macroeconomics Annual, 115-165.

Hansen, Lars P., John Heaton, and Erzo G. J. Luttmer (1995). “Econometric evaluation of asset pricing models.” Review of Financial Studies 8(2): 237-274.

Hansen, Lars P. and Ravi Jagannathan (1991). “Implications of security market data for models of dynamic economies.” Journal of Political Economy 99: 225-262.

 

5. Discount factors, betas and mean-variance frontier

Cochrane chapters 6-7.

Roll, Richard (1977). “A critique of the asset pricing theory’s tests.” Journal of Financial Economics 4: 129-176.

 

6. Conditioning information: cross sectional variation in risk premia

Cochrane chapter 8.

Jagannathan, Ravi and Zhenyu Wang (1996). “The conditional CAPM and the cross-section of expected returns.” The Journal of Finance 51(1): 3-53.

 

7. Factor pricing models

Cochrane chapter 9. CLM Ch 6, 219-231. Ingersoll Ch 7.

Cochrane, John (1999b). “Portfolio advice for a multifactor world.” FED Chicago Economic Perspectives 23(3).

Constantinides, George M. (1989). “Theory of valuation: overview and recent developments.” In Sudipto Battacharya and George M. Constantinides (eds.), Theory of Valuation, Rowman & Littlefield.

 

8. The equity premium puzzle

Cochrane chapter 21. CLM Ch 8.

Cochrane, John J. (2000). “Where is the market going? Uncertain facts and novel theories.” Economic Perspectives, FED Chicago, 3-37.

Campbell, John Y. (1999). “Asset prices, consumption, and the business cycle.” In J. B. Taylor and M. Woodford (eds), Handbook of Macroeconomics.

Campbell, John Y. and John H. Cochrane (1999). “By force of habit: a consumption-based explanation of aggregate stock market behavior.” Journal of Political Economy 107(2): 205-251.

Constantinides, George M. (1990). “Habit formation: a resolution of the Equity Premium Puzzle.” Journal of Political Economy 98: 519-543.

Constantinides, George M. and Darrell Duffie (1996). “Asset pricing with heterogeneous consumers.” Journal of Political Economy 104: 219-240.

Hansen, Lars P. and Kenneth J. Singleton (1983). “Stochastic consumption, risk aversion, and the temporal behavior of asset returns.” Journal of Political Economy 91: 249-268.

Mehra, Rajnish and Edward Prescott (1985). “The equity premium: a puzzle.” Journal of Monetary Economics 15: 145-161.

 

9. Time variation in asset returns and consumption

Campbell, John Y. (1993). “Intertemporal asset pricing without consumption data.” American Economic Review 83: 487-512.

Campbell, John Y. (1996). “Understanding risk and return.” Journal of Political Economy 104(2): 298-345.

Epstein, Larry G. and Stanley Zin (1991). “Substitution, risk aversion, and the temporal behavior of consumption and asset returns: an empirical analysis.” Journal of Political Economy 99(2): 263-286.

Lettau, Martin and Sydney Ludvigson (2001a). “Consumption, aggregate wealth and expected stock returns.” Journal of Finance 56: 815-849.

Lettau, Martin and Sydney Ludvigson (2001b). “Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying.” Journal of Political Economy 109: 1238-1287.

Lustig, Hanno N. and Stijn G. Van Nieuwerburgh (2005). “Housing Collateral, Consumption Insurance, and Risk Premia: an Empirical Perspective.” Journal of Finance 55(3): 1167-1219.

 

10. Long-run risk and asset pricing. Time variation in risk premia

Bansal, Ravi and Amir Yaron (2004). “Risks for the long run: a potential resolution of asset pricing puzzles.” Journal of Finance 59(4): 1481-1509.

Yogo, Motohiro (2006) “A consumption-based explanation of expected stock returns.” Journal of Finance 61(2): 539-580.