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Asset Pricing and Financial Contracts - Structure
Asset Pricing and Financial Contracts - Structure

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ALESSANDRO MISSALE , responsible for the course

Degree in FINANCE AND ECONOMICS (MEF) - Classe LM-16 Enrolled from 2017/2018 academic year - Laurea Magistrale - FINANCIAL ECONOMICS - 2018/2019

Compulsory course or activityyes
Year of course2s
Term or semester2nd term
Scientific fields (settori scientifico-disciplinari)
  • SECS-P/01 - Economia politica
ECTS credits (CFU) compulsory12
ECTS credits - facultative-

General information

Aims and objectives: The first part of the course aims to provide a good knowledge of the core principles and topics of modern asset pricing theory. It presents key concepts, relations, and models of asset pricing to develop a sound understanding of the pricing of financial assets under realistic conditions of a multiperiod stochastic environment with incomplete markets. The Asset Pricing module covers various theories from the Stochastic Discount Factor Theory to the Consumption Capital Asset Pricing Model and discusses practical issues such as the equity premium puzzle. The second part of the course aims to provide the students with the basic principles of modern contract theory. The main concepts are discussed within a unified framework. After having introduced the basic model of symmetric information, the case of asymmetric information is discussed, in relation with the problems of moral hazard, adverse selection and signaling. The analytical tools developed are then used to analyze issues related to credit and insurance markets.

Language of instruction: English

Syllabus

Web:

http://ariel.unimi.it/

Short course description english flag

The first part of the course provides an introduction to the modern theory of asset pricing within discrete-time models. First, asset pricing is examined within static and multiperiod economies with complete markets. Then, the Stochastic Discount Factor based Asset Pricing Theory is presented. The final part of the Asset Pricing module deals with Classical equilibrium theory; it derives the quantitative implications of the Consumption Capital Asset Pricing Model, and discusses the equity premium puzzle. The second part of the course introduces the modern contract theory. First, a general benchmark model of symmetric information is developed. Then the key concepts of pre-contractual and post-contractual asymmetric information are discussed. Finally, several applications to credit and insurance markets are introduced.

Syllabus Module Asset Pricing:

List of Topics
1. Financial markets and institutions
2. Single period securities markets
3. Risk aversion and risk premium
4. The Euler Equation and the Stochastic Discount Factor (SDF)
5. Mean Variance Frontier and Beta Representations
6. The Relationship Between the SDF, Betas, and Mean-Variance Frontiers
7. The Capital Asset Pricing Model (CAPM)
8. The Intertemporal and Consumption-Based CAPM
9. The Arbitrage Pricing Theory
10. The Equity Premium Puzzle

Readings Module Asset Pricing:

Stanley R. Pliska, Introduction to Mathematical Finance, Blackwell, 1997. Chapter 1.
Jhon H. Cochrane, Asset Pricing. Revised edition, Princeton University Press, 2005. Chapters: 1, 2, 3, 4, 5, 6, 8, 9.
Chi-Fu Huang and Robert H. Litzenberger, Foundations for Financial Economics, Prentice Hall (Elsevier Science Ltd.), 1988. Chapters: 5, 6, 7.

Syllabus Module Financial Contracts:

Part I): Theory
– The principal-agent model.
– Contractual design under perfect information.
– Contractual design under imperfect information (I): moral-hazard.
– Contractual design under imperfect information (II): adverse selection.
– Contracts and signaling.
Part II) Applications
– Insurance.
– The lender-borrower relationship.
– Financial intermediation.
– Banks as delegated monitors.
– Credit rationing and the role of collateral;

Readings Module Financial Contracts:

I. MACHO-STADLER-J.D. PÉREZ-CASTRILLO, An Introduction to the Economics of Information: Incentives and Contracts, Oxford University Press, last edition.
II. X. FREIXAS-J.C. ROCHET, Microeconomics of banking, MIT Press, 2008 (second edition).

Prerequisites, exams and assessment

Examunico
Type of assessmentEsame
Assessmentvoto verbalizzato in trentesimi

Prerequisites, exams and assessment For the Asset Pricing module: Written exam (approximately 1 hour and 30 minutes). The exam covers all the topics presented during lectures and it consists of a series of open-ended questions which may include calculations and/or explanation and/or technical analysis. The exam aims to verify that the course objectives have been achieved; i.e. that students have learned the theory, and know how to use macroeconomic concepts to interpret economic events and data, and to analyze simple policy issues. For the Financial Contracts model: Written exam (approximately 1 hour). The exam covers all the topics presented during lectures and it consists of a series of questions and exercises. The exam aims to verify that the course objectives have been achieved, that is: students have learnt the economic intuition of the models presented in the lessons and are able to apply the key concepts to practical cases.

Propaedeutical courses Decision Theory and Behavioural Economics

Structure of the course

Module Asset Pricing, Module Asset Pricing

Scientific fields

  • SECS-P/01 - Economia politica - Credits: 6
Activities

Lezioni: 40 hours

Module Financial Contracts, Module Financial Contracts

Scientific fields

  • SECS-P/01 - Economia politica - Credits: 6
Activities

Lezioni: 40 hours

Teachers ' office hours

Teacher's office hours
TeacherOffice location
ALESSANDRO MISSALE , responsible for the courseRicevimento: Martedi' ore 13.45 - 16.00DEMM, via Conservatorio 7, stanza 5 secondo piano
STEFANO COLOMBO

Further information

The course is in two parts: Asset Pricing and Financial Contracts. Please see the corresponding programs