Postgraduate Course: Asset Pricing (ECNM11031)
Course Outline
| School | School of Economics |
College | College of Arts, Humanities and Social Sciences |
| Credit level (Normal year taken) | SCQF Level 11 (Postgraduate) |
Availability | Available to all students |
| SCQF Credits | 10 |
ECTS Credits | 5 |
| Summary | The aim of the module is to provide students with a good foundation in asset pricing, by using a blend of theoretical concepts, empirical evidence and some applications of the theory. The intention is for the students to increase their knowledge and understanding of modern finance theory. Within this context, the module covers the following topics: mean-variance analysis, the Capital Asset Pricing Model (CAPM), the Arbitrage Pricing Theory (APT), consumption-CAPM, pricing of derivatives and fixed income assets. |
| Course description |
Course Structure:
The module consists of three parts. Each part corresponds to six hours of contact time. Part A covers the main asset pricing models: CAPM, APT, C-CAPM; Part B considers derivative pricing including puts and calls, the binomial and Black-Scholes model. Part C considers the measurement of risk and the pricing of fixed-income securities. Part A is taught by Yu-Fu Chen. Parts B and C are taught by Tim Worrall.
All materials will be available to access from the course Learn pages.
Course Content:
Part A:
Asset Pricing Models (6 hours)
Dr Yu-Fu Chen
Expected Utility and Mean-Variance Analysis (MVA)
Capital Asset Pricing Model (CAPM)
Arbitrage Pricing Theories (APT)
Consumption Capital Asset Pricing Model (C-CAPM)
Part B:
Derivative Pricing (6 hours)
Prof Tim Worrall
Options and Futures
Binomial Option Pricing
Black-Scholes Option Pricing
Option Risk
Part C:
The Measurement of Risk and the Pricing of Fixed Income Securities (6 hours)
Prof Tim Worrall
The Measurement of Risk
Basic Characteristic of Bonds and their Types
The Term Structure of Interest Rates
A Stationary Model of the Term Structure
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Entry Requirements (not applicable to Visiting Students)
| Pre-requisites |
It is RECOMMENDED that students have passed
Macroeconomics 2 (ECNM11022) AND
Microeconomics 2 (ECNM11025)
|
Co-requisites | |
| Prohibited Combinations | |
Other requirements | Students should be enrolled on MSc Economics, MSc Economics (Econometrics), MSc Economics (Finance) or MSc Mathematical Economics and Econometrics.
Any other students must email sgpe@ed.ac.uk in advance to request permission.
|
Information for Visiting Students
| Pre-requisites | Students should be enrolled on MSc Economics, MSc Economics (Econometrics), MSc Economics (Finance) or MSc Mathematical Economics and Econometrics.
Any other students must email sgpe@ed.ac.uk in advance to request permission.
|
| High Demand Course? |
Yes |
Course Delivery Information
|
| Academic year 2024/25, Available to all students (SV1)
|
Quota: None |
| Course Start |
Block 4 (Sem 2) |
Timetable |
Timetable |
| Learning and Teaching activities (Further Info) |
Total Hours:
100
(
Lecture Hours 18,
Summative Assessment Hours 2,
Programme Level Learning and Teaching Hours 2,
Directed Learning and Independent Learning Hours
78 )
|
| Assessment (Further Info) |
Written Exam
100 %,
Coursework
0 %,
Practical Exam
0 %
|
| Additional Information (Assessment) |
Assessment:
By a two-hour degree exam (100%).
The exam will be in-person, closed-book, and held in the May exam diet.
There will be five questions on the exam paper split into two sections, one section for each lecturer. That is one section (with two questions) for Part A and one section (with three questions) for Parts B and C of the course. You will be asked to answer two questions from the paper, but you must answer one question from each of the two different sections.
Some questions may involve sub-questions that are built around simple numerical examples. These are designed to test both understanding and the ability to properly interpret and put results in context. Other questions or sub-questions will require a discursive and critical evaluation of the knowledge and understanding gained during the course.
Although you must answer questions from two sections, this does not mean you can pass the exam by only studying one-third of the topics covered. There is considerable overlap between topics and a question on say, efficient markets may require knowledge of the CAPM or APT or a question on derivative pricing may require knowledge of the portfolio choice.
The exam is marked by the course organisers and then moderated. The course mark is moderated by the external examiner. |
| Feedback |
You will be provided with a series of questions (some multiple choice) that will enable you to evaluate your progress against the learning outcomes for the course. The teaching team will provide feedback on the questions, including the preferred answers and guidance on expected progress outcomes 2-3 weeks later for self-assessment. |
| Exam Information |
| Exam Diet |
Paper Name |
Hours & Minutes |
|
| Main Exam Diet S2 (April/May) | | 2:00 | |
Learning Outcomes
On completion of this course, the student will be able to:
- To gain a knowledge and understanding of the building blocks of modern financial economics.
- To gain a knowledge and understanding of the application of economic principles and reasoning to the main asset pricing models.
|
Reading List
Essential reading is indicated by a *.
Part A
On MVA, CAPM and APT:
*Lecture Notes
*Cochrane, John, 2005, Asset Pricing: (Revised edition). Princeton University Press.
Back, Kerry, 2017, Asset Pricing and Portfolio Choice Theory. Oxford University Press.
Campbell, John Y. 2018, Financial Decisions and Markets, Princeton University Press.
Campbell John Y., 2000, ¿Asset Pricing at the Millennium¿, Journal of Finance, 55, 1515- 1567.
Chen, Nai-Fu, Roll, Richard, and Ross, Steven A., 1986, ¿Economic Forces and the Stock Market¿, Journal of Business, 59, 383-403.
Duffie, D, 2001, Dynamic Asset Pricing Theory. Princeton: Princeton University Press.
Fama, Eugene F. and Kenneth R. French, 1992, ¿The Cross Section of Expected Stock Returns¿, Journal of Finance, 47, 427-466.
Fama, Eugene F. and Kenneth R. French, 1993, ¿Common Risk Factors in the Returns on Stock and Bonds¿, Journal of Financial Economics, 33, 3-56.
*Fama, Eugene F. and Kenneth R. French, 2004, ¿The Capital Asset Pricing Model: Theory and Evidence¿, Journal of Economic Perspectives, 18(3), 25-46.
Jaganathan, R. and Z. Wang, 1996, ¿The Conditional CAPM and the Cross-Section of Expected Returns¿, Journal of Finance, 51, 3-54.
Roll, Richard and Stephen A. Ross, 1980, ¿An Empirical Investigation of the Arbitrage Pricing Theory¿, Journal of Finance, 35, 1073-1103.
On C-CAPM
*Lecture Notes
*Cochrane, John, 2005, Asset Pricing: (Revised edition). Princeton University Press.
Back, Kerry, 2017, Asset Pricing and Portfolio Choice Theory, Oxford University Press.
Benartzi, Shlomo and Richard H. Thaler, 1995, ¿Myopic Loss Aversion and the Equity Premium Puzzle,¿ The Quarterly Journal of Economics, 110, 73-92.
Campbell, John Y. 2018, Financial Decisions and Markets, Princeton University Press.
Fama, Eugene and Kenneth R. French, 2002, ¿The Equity Premium¿, Journal of Finance, 57, 54-69.
Lettau, Martin, and Sydney Ludvigson, 2001, "Resurrecting the (C)CAPM: A Cross-sectional Test when Risk Premia are Time-Varying," Journal of Political Economy, 109, 1238-1287.
Lewellen, Jonathan and Stefan Nagel, 2006, ¿The Conditional CAPM does not Explain Asset-Pricing Anomalies,¿ Journal of Financial Economics, 82, 289¿314.
Part B:
*Lecture Notes
Hull, John, 2021, Options, Futures, and Other Derivatives, 11th Edition, Pearson.
Dubofsky, David and Miller, Thomas, 2003, Derivatives: Valuation and Risk Management, OUP.
Black, F, and M. Scholes, 1973, ¿The Pricing of Options and Corporate Liabilities¿, Journal of Political Economy, 81, 637-59.
Cox, J., S. Ross, and M. Rubinstein, 1979, ¿Option Pricing: A Simplified Approach¿, Journal of Financial Economics, 7, 229-64.
Merton, R. C., 1973, ¿Theory of Rational Option Pricing¿, Bell Journal of Economics and Management Science, 4, 141-13.
Part C:
*Lecture Notes
*Martin, Ian and Stephen Ross, 2019, ¿Notes on the Yield Curve¿ Journal of Financial Economics, 134, 689-702.
Levy, Haim, 2016, ¿Stochastic Dominance¿, 3rd edition. Springer.
Alvarez, F. and Jermann, U.J. 2005, ¿Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth¿. Econometrica, 73, 1977-2016.
Roy, Andrew D, 1952, ``Safety First and the Holdings of Assets'', Econometrica, 20, 431-449.
Heath, D., Jarrow, R., and A. Morton, 1992, ¿Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation¿, Econometrica, 60, 77-105.
Hull, John, 2021, Options, Futures, and Other Derivatives, 11th Edition, Pearson.
Jarrow, R.A., 2002 ¿Modeling Fixed-income Securities and Interest Rate Options,¿ Stanford University Press, Stanford.
Lucas, Robert E. 1978, ¿Asset Prices in an Exchange Economy. Econometrica, 46,1429¿1445.
Rachev, Svetlozar, Stoyan Stoyanov and Frank J. Fabozzi, 2008, ¿Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures¿, Wiley.
Vasicek, Oldrich A. 1977, ¿An Equilibrium Characterization of the Term Structure.¿ Journal of Financial Economics, 5, 177¿188.
Poon, S-H and R.C. Stapleton 2005, ¿Asset Pricing in Discrete Time: A Complete Markets Approach,¿ Oxford University Press, Oxford.
Ross, Stephen, 2015, ¿The Recovery Theorem¿, Journal of Finance, 70, 615-648. |
Additional Information
| Course URL |
http://www.sgpe.ac.uk/ |
| Graduate Attributes and Skills |
Not entered |
| Keywords | Not entered |
Contacts
| Course organiser | Prof Timothy Worrall
Tel: (0131 6)51 5128
Email: Tim.Worrall@ed.ac.uk |
Course secretary | |
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