Objectives

Macro Finance is taught in English and is opened to both second-year MScE and MScF students (other students may be admitted with instructor's consent). This Financial Economics course has two objectives. On the one hand it aims at providing more Economics-oriented students with graduate level Asset pricing tools, such as contingent claims pricing, no-arbitrage factor pricing or consumption-based equilibrium valuations. On the other, it also aims at providing more Finance-oriented students with graduate level Macro tools such as investment theory, production-based pricing, or money demand models. Finally, topics of interest to both groups such as incomplete markets pricing, or frictions will also be discussed.

Contents

1- Complete contingent claims (Altug and Labadie, 2008, ch. 1), (Cochrane, 2005, ch. 3), (Danthine and Donaldson, 2005, ch. 8).

• Static security market equilibrium.
• Optimality and representative consumer

2- Arbitrage and asset valuation (Altug and Labadie, 2008, ch. 2), (Cochrane, 2005, ch. 4), (Danthine and Donaldson, 2005, ch. 10)

• Absence of arbitrage.
• Existence of state-price vector.
• Binomial security markets

3- CAPM and APT (Altug and Labadie, 2008, ch. 4), (Cochrane, 2005, ch. 9), (Danthine and Donaldson, 2005, chs. 7, 13)

• Capital Asset Pricing Model.
• Arbitrage Pricing Theory 2.

4- Consumption and savings (Altug and Labadie, 2008, ch. 5)

• Deterministic economy.
• Portfolio choices.
• Random walks.
• Permanent income.
• Precautionary savings.

5- Inter-temporal risk sharing* (Altug and Labadie, 2008, ch. 7), (Cochrane, 2005, ch. 9), (Ljungvist and Sargent, 2004, ch. 8), (Danthine and Donaldson, 2005, ch. 10).

• Multi-period contingent claims.
• Idiosyncratic endowment risk.
• Risk sharing with idiosyncratic and aggregate risk.

6- Consumption and asset pricing (Altug and Labadie, 2008, ch. 8), (Cochrane, 2005, ch. 21), (Ljungvist and Sargent, 2004, ch. 13), (Danthine and Donaldson, 2005, ch. 9).

• Consumption-based CAPM.
• Pricing alternative assets.
• Growth and cointegration.

7- Economies with production (Altug and Labadie, 2008, ch. 10).

• Recursive competitive equilibrium with production.
• Extensions: Distortions and expectations.
• Solving production models.
• Financial structure

8- Investment theory (Altug and Labadie, 2008, ch. 11)

• Neoclassical theory of investment.
• Q theory with adjustment costs.
• Irreversibility and asset prices.

9- Money demand* (Altug and Labadie, 2008, ch. 13).

• Basic CIA model.
• Inflation and interest rates.
• Transactions services (MIU).
• Growth.
• Real impacts of money.

10- Asset pricing with frictions* (Altug and Labadie, 2008, ch. 15), (Ljungvist and Sargent, 2004, ch. 17).

• Role of idiosyncratic risks.
• Transaction costs

11- Borrowing constraints* (Altug and Labadie, 2008, ch. 16).

• Idiosyncratic risk and borrowing constraints.
• Turnpike model (Townsend)

*: If time permits

References

• Altug, Sumru, and Pamela Labadie (2008) Asset Pricing for Dynamic Economies (Cambridge, UK: Cambridge University Press)
• Cochrane, John H. (2005) Asset Pricing, revised ed. (Princeton, NJ and Oxford, UK: Princeton University Press)
• Danthine, Jean-Pierre, and John Donaldson (2005) Intermediate Financial Theory Advanced Finance Series, 2 ed. (Burlington, MA: Elsevier Academic Press)
• Ljungvist, Lars, and Thomas J. Sargent (2004) Recursive Macroeconomic Theory, 2 ed. (Cambridge, Massachussetts; London, England: MIT Press)

Pre-requisites

Having completed 60 credits of MScE, or MScF programs, or with Instructor's consent

Evaluation

First attempt

Exam:

Written 2h00 hours

Documentation:

Not allowed

Calculator:

Not allowed

Evaluation:

Final exam, 100% of final grade.

Retake

Exam:

Written 2h00 hours

Documentation:

Not allowed

Calculator:

Not allowed

Evaluation:

In the event where a makeup exam would be required, only the grade from this exam will be used to compute the final grade.