Computational Financial Econ

3 Credits · Level: Graduate, Undergraduate

The objective of this course is to introduce students to computational finance, with an emphasis on asset pricing methods for economists in applied settings. After brief and heuristic overviews of mathematical preliminaries and options payoffs, the course covers the derivation of the Black-Scholes option-pricing equation, from both analytical and numerical perspectives, as well as approaches for deriving option-implied probability distributions. The course then turns to computational methods that are useful for the analysis of the term structure of risk-free interest rates and related futures contracts; the subjects include binomial trees, model calibration, and futures-implied probability distributions. The last part of the course will focus on the computational analysis of credit-related financial assets, with an emphasis on bootstrapping risk-neutral default probabilities from liquid instruments in order to value other credit products. Computational topics to be discussed and used throughout the course include Monte-Carlo simulation and related variance-reduction techniques as well as an introduction to finite-difference methods for solving asset-pricing partial differential equations.