Prof Ian Martin, Dr Cameron Peng, Prof Christopher Polk, Prof Dimitri Vayanos

This course is compulsory on the MRes/PhD in Finance. This course is available with permission as an outside option to students on other programmes where regulations permit.

This course is not capped; any eligible student that requests a place will be given one.

The course is divided into two parts, one relating to theoretical asset pricing and one to empirical asset pricing. The theoretical part covers dynamic models of frictionless markets, both in discrete and in continuous time, and models with frictions. The frictionless material includes the theory of no-arbitrage and the scholastic discount factor; return predicatability and excess volatility; derivatives; and equilibrium models of financial markets. The frictions material includes micro models of frictions such as, asymmetric information, costs of search and market participation, and leverage constraints, and models showing how the frictions affect equilibrium prices of stocks, government bonds, and currencies. 

The second half of the course is an introduction to empirical asset pricing with a focus on stylized facts and the ability of asset-pricing theories to explain those findings. We first study single and multifactor models of the cross-section of average returns, focusing on the variety of methods that one can use to estimate and test such models. We next examine time-series predictability, with an emphasis on the present-value models that facilitate an understanding of those patterns, both in the aggregate and at the level of the firm. With that evidence and those methods in hand, we then study neoclassical extensions of the CAPM – including the Consumption CAPM (CCAPM), conditional versions of the CAPM and CCAPM, and the Intertemporal CAPM – that aim to explain those important stylized facts. Finally, we depart from the neoclassical paradigm, studying topics that include price-level tests of market efficiency, key findings related to institutional trading, demand-based asset pricing, behavioural and household finance and belief formation.

30 hours of lectures in the AT. 30 hours of lectures in the WT.

• John Campbell, 1999, Asset prices, consumption, and the business cycle, in J. B. Taylor and M. Woodford, Eds., Handbook of Macroeconomics, Volume 1C, Elsevier Science B.V

• John Campbell, 2017, Financial Decisions and Markets: A Course in Asset Pricing, Princeton University Press

• John Cochrane, 2004, Asset Pricing, Princeton University Press

• David Kreps, 2020, The Black-Scholes-Merton Model as an Idealization of Discrete-Time Economies, Econometric Society Monograph, Cambridge University Press.

• Andrei Shleifer, 2000, Inefficient Markets: An Introduction to Behavioral Finance, Clarendon Lectures in Economics, Oxford University Press.

• Kenneth Singleton, 2006, Empirical Dynamic Asset Pricing, Princeton University Press

Continuous assessment (100%).