Financial Economics

3 Credits · Level: Graduate, Undergraduate

Econ 571, Financial Economics, exposes students to the economic foundations of finance from both theoretical and empirical perspectives. The first part of the course explains the concepts behind the basic models, analyzing influences on the demand and supply of financial assets as well as pricing dynamics for such assets. We will use the textbook by Danthine and Donaldson to assess the role of risk aversion when considering investment projects in an environment of uncertainty as well as to develop two basic models: the Capital Asset Pricing Model (CAPM) and the Consumption CAPM. These concepts will be used to pose and solve the standard portfolio choice problem. The second part of the course provides a brief introduction to empirical finance. Starting with the CAPM and the Consumption CAPM, time-series techniques and the econometric software package R are employed to assess the theory’s capacity to match financial return dynamics observed in the post-war period. Building on these results, the focus then moves to factor models (Fama-French, Pastor-Stambaugh, Barberis-Shleifer-Vishny), using the original papers to discuss implications and improvements over the canonical models. The course concludes with an analysis of an empirical long-term dynamic portfolio choice problem, following the work of Campbell and Viceira. Course grades are based on periodic homework assignments (20 percent), a midterm exam (35 percent), and a final exam (45 percent).