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, and pricing of derivative, including pricing of options and futures. |
| 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 A is taught by Yu-Fu Chen. Parts B is taught by Di Luo.
All materials will be available to access from the course Learn pages.
Course Content:
Part A:
Asset Pricing Models (9 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)
Stochastic Discount Factor (SDF) and Empirical Evidence.
Part B:
Derivative Pricing (9 hours)
Prof Di Luo
Options and Futures
Binomial Option Pricing
Black-Scholes Option Pricing
Option Risk
|
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 2026/27, Available to all students (SV1)
|
Quota: 0 |
| 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 four or five questions on the exam paper split into two sections, one section for each lecturer. That is one section for Part A and one section for Part B 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 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 |
Minutes |
|
| Main Exam Diet S2 (April/May) | | 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 the knowledge and understanding of application of economic principles and reasoning to the main asset pricing models.
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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.
¿ Elton E.J., M.J. Gruber, S.J. Brown, and W.N. Goetzmann, 2010, Modern Portfolio Theory and Investment Analysis. New York: John Wiley & Sons, Inc, 8th edition
¿ 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, SDF, and empirical evidence
¿ *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.
¿ Santos, Tano and Pietro Veronesi, 2006, ¿Labor Income and Predictable Stock Returns¿, Review of Financial Studies, 19, 1-44.
¿ Hou, Kewei, Chen Xue and Lu Zhang, 2015, ¿Digesting Anomalies: An Investment Approach¿, The Review of Financial Studies, 28(3), 650¿705.
¿ Fama, Eugene F. and Kenneth R. French, 2015. ¿A five-factor asset pricing model¿, Journal of Financial Economics, 116, 1¿22.
Part B:
¿ *Lecture Notes
Textbooks
¿ *Hull, John, 2021, Options, Futures, and Other Derivatives, 11th Edition,
¿ Merton, R. C. (1992). Continuous-Time Finance. Wiley.
¿ Shreve, S. E. (2004). Stochastic calculus for finance II: Continuous-time models (Vol. 11). Springer Science & Business Media.
¿ Steele, J. M. (2012). Stochastic calculus and financial applications (Vol. 45). Springer Science & Business Media.
¿ Stokey, N. L. (2008). The economics of inaction. Princeton University Press.
¿ Strang, G. (2014). Differential Equations and Linear Algebra. Wellesley-Cambridge Press.
Journal Articles
Week 25th March
¿ Barber, B.M., Huang, X., Odean, T. and Schwarz, C., 2022. Attention¿induced trading and returns: Evidence from Robinhood users. The Journal of Finance, 77(6), pp.3141-3190.
¿ Van Binsbergen, J., Hueskes, W., Koijen, R., & Vrugt, E. (2013). Equity yields. Journal of Financial Economics, 110(3), 503-519.
¿ Boehmer, E., Jones, C. M., Zhang, X., & Zhang, X. (2021). Tracking retail investor activity. The Journal of Finance, 76(5), 2249-2305.
¿ Eaton, G. W., Green, T. C., Roseman, B., & Wu, Y. (2021). Zero-commission individual investors, high frequency traders, and stock market quality. High Frequency Traders, and Stock Market Quality (January 2021).
¿ Ernst, T., & Spatt, C. S. (2022). Payment for Order Flow and Asset Choice (No. w29883). National Bureau of Economic Research.
¿ Lettau, M., & Madhavan, A. (2018). Exchange-traded funds 101 for economists. Journal of Economic Perspectives, 32(1), 135-54.
¿ Menkveld, A. J., & Vuillemey, G. (2020). The economics of central clearing. Annual Review of Financial Economics, 13.
¿ Roll, R., 1984. Orange juice and weather. American Economic Review, 74(5), pp.861-880.
Week 1st April
¿ Cox, J., S. Ross, and M. Rubinstein, 1979, ¿Option Pricing: A Simplified Approach¿, Journal of Financial Economics, 7, 229-64.
¿ Black, F., 1975. Fact and fantasy in the use of options. Financial Analysts Journal, 31(4), pp.36-41.
¿ Bryzgalova, S., Pavlova, A., & Sikorskaya, T. (2022). Retail Trading in Options and the Rise of the Big Three Wholesalers. Available at SSRN.
¿ Eaton, G. W., Green, T. C., Roseman, B., & Wu, Y. (2022). Retail Option Traders and the Implied Volatility Surface. Available at SSRN 4104788.
¿ Gârleanu, N. B., Panageas, S., & Zheng, G. X. (2021). A Long and a Short Leg Make For a Wobbly Equilibrium (No. w28824). National Bureau of Economic Research.
¿ Pedersen, L. H. (2021). Game on: Social networks and markets. Available at SSRN 3794616.
¿ Welch, I. (2022). The wisdom of the Robinhood crowd. The Journal of Finance, 77(3), 1489-1527.
Week 8th April
¿ Black, F, and M. Scholes, 1973, ¿The Pricing of Options and Corporate Liabilities¿, Journal of Political Economy, 81, 637-59.
¿ Merton, R. C., 1973, ¿Theory of Rational Option Pricing¿, Bell Journal of Economics and Management Science, 4, 141-13.
¿ Black, F., 1989. How we came up with the option pricing formula. Journal of Portfolio Management, 15, 2, 4-8.
¿ Brenner, M., & Izhakian, Y. (2018). Asset pricing and ambiguity: Empirical evidence. Journal of Financial Economics, 130(3), 503-531.
¿ Brenner, M., & Izhakian, Y. (2022). Risk and Ambiguity in Turbulent Times. The Quarterly Journal of Finance, 12(01), 2240001.
¿ Cheah, J. E. T., Luo, D., Zhang, Z., & Sung, M. C. (2020). Predictability of bitcoin returns. The European Journal of Finance, 1-20.
¿ Core, J., & Guay, W. (2002). Estimating the value of employee stock option portfolios and their sensitivities to price and volatility. Journal of Accounting research, 40(3), 613-630.
¿ Cox, J.C., Ross, S.A. and Rubinstein, M., 1979. Option pricing: A simplified approach. Journal of financial Economics, 7(3), pp.229-263.
¿ Du, J., & Kapadia, N. (2012). The tail in the volatility index. U. Massachusetts, Amherst Working paper.
¿ Luo, D., Mishra, T., Yarovaya, L., & Zhang, Z. (2021). Investing during a Fintech revolution: ambiguity and return risk in cryptocurrencies. Journal of International Financial Markets, Institutions and Money, 73, [101362].
¿ Merton, R.C., 1973. Theory of rational option pricing. Bell Journal of Economics and Management Science, 4, 141-83.
¿ Nagel, S., 2012. Evaporating liquidity. Review of Financial Studies, 25(7), pp.2005-2039.
¿ Nagel, S., & Purnanandam, A. (2020). Banks¿ risk dynamics and distance to default. The Review of Financial Studies, 33(6), 2421-2467.
¿ Smith Jr, C.W., 1976. Option pricing: A review. Journal of Financial Economics, 3(1-2), pp.3-51.
¿ Trigeorgis, L., & Lambertides, N. (2014). The role of growth options in explaining stock returns. Journal of Financial and Quantitative Analysis, 49(3), 749-771.
¿ Yan, S. (2011). Jump risk, stock returns, and slope of implied volatility smile. Journal of Financial Economics, 99(1), 216-233.
News Articles
Week 25th March
¿ Retail traders being pushed into risky ¿professional¿ bets, UK watchdog warns https://www.ft.com/content/2702f9bc-f04e-41e0-88d7-768deda1a306
¿ We haven¿t reduced financial risk, just transformed it https://www.ft.com/content/61ee8c1e-0da6-4f12-b935-6de45f159364
¿ Hot demand for bitcoin ETF as ¿Wild West¿ meets Wall St https://on.ft.com/3prz4MS
¿ Traders bet ethereum will benefit from ETF boost in 2022 https://on.ft.com/3Cu5E4I
¿ Margin requirement
https://www.finra.org/rules-guidance/key-topics/margin-accounts
¿ Liability Driven Investments
https://actuaries.blog.gov.uk/2022/10/24/liability-driven-investments/
Week 25th March
¿ Derivatives trading surges for big US tech companies
https://on.ft.com/2SQKYhQ
¿ Robinhood gets caught in the meme stock machine https://on.ft.com/3lR0hqP
¿ Meme stocks turn boring https://on.ft.com/2T0WLhq
¿ AMC is an options market puppet https://on.ft.com/2SWwwbs
¿ Why Beyond Meat shares surged over 1,000% in four days https://www.bbc.co.uk/news/articles/cew4kqg09j8o
¿ Defi derivatives: https://www.synthetix.io/ |
Additional Information
| Course URL |
http://www.sgpe.ac.uk/ |
| Graduate Attributes and Skills |
Not entered |
| Keywords | Not entered |
Contacts
| Course organiser | Dr Steven Dieterle
Tel: (0131 6)51 5127
Email: Steven.Dieterle@ed.ac.uk |
Course secretary | Ms Sam Stewart
Tel:
Email: v1sstew7@ed.ac.uk |
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