THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND ECONOMICS. FINA6016 Asset Pricing Theory

Transcription

1 THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND ECONOMICS BE57/518 FINA6016 Asset Pricing Theory GENERAL INFORMATION Instructor: Shiyang Huang Shiyang Huang Office: KKL 834 Phone: Consultation times: By appointment Tutor: None Pre-requisites: N/A Co-requisites: N/A Mutually exclusive: None Course Website: None Other important details: This course is a research-intensive course and is mainly designed for research postgraduate students to prepare for PhD-level research COURSE DESCRIPTION This course is an introductory PhD level course on the basic theories of asset pricing. It consists of five parts. The first part deals with individual choices under uncertainty, including expected utility theory, risk aversion, and two-period consumption portfolio problems. The second part deals with equilibrium pricing theories, including implications of no arbitrage and stochastic discount factor, risk sharing, aggregation, and consumption-based pricing in complete markets, mean-variance efficiency and the Capital Asset Pricing Model. We also explore the relation between these various pricing theories and extend the treatment of individual consumption/portfolio problems and equilibrium pricing to a multi-period setting. In the third part, we review recent developments in asset pricing by introducing some stylized facts and new theories. The fourth part introduces asymmetric information in financial markets. The fifth part provides a brief introduction of the recent development of market frictions in financial markets, including leverage constraints, short selling constraints and the interaction between financial markets and real economy. COURSE LEARNING OBJECTIVES 1. To be familiar with literature 2. To derive basic asset pricing theories 3. To learn about basic theories in information asymmetry 4. To learn some recent development in asset pricing theories FACULTY GOALS Goal 1: To conduct quality research independently in their area of specialization Goal 2: To be able to teach subjects in their specialization Goal 3: To inculcate professionalism and leadership Goal 4: To master communication skills

2 COURSE LEARNING OUTCOMES (CLO) Course Learning Outcomes Aligned Faculty Goals CLO1. CLO2. CLO3. CLO4. CLO5. CLO6. Understand the basic model assumptions of asset pricing and corporate finance. Set-up and derive models for asset pricing and corporate finance. Understand the basics of SAS and STATA programming. Analyze asset pricing problems with SAS and STATA Read and replicate important literature Develop new research idea, position in the literature, derive corresponding models, and conduct empirical tests 1, 2 1, , 2 2, 3 COURSE TEACHING AND LEARNING ACTIVITIES Course Teaching and Learning Activities Expected contact hour Study Load (% of study) T&L1. Lectures T&L2. Assignments T&L3. Self-study 36 hours 72 hours 36 hours 25% 50% 25% Total 144 hours 100% Assessment Methods Brief Description (Optional) Weight Aligned Course Learning Outcomes A1. Participations 10% 10% CLO 1, 2, 3, 4, 5, 6 A2. Assignments 40% 50% CLO 1, 2, 3, 4, 5, 6 A3. Examinations 50% 40% CLO 1, 2, 4, 5 Total 100% 100% STANDARDS FOR ASSESSMENT Course Grade Descriptors A+, A, A- - Novel research idea, clean and clever model derivation, outstanding economic intuition, solid theoretical analyses, and good discussions of results. B+, B, B- - Mediocre research idea, reasonable model derivation, understandable economic intuition, theoretical empirical analyses, and plain discussion of results. C+, C, C- D+, D - Poor idea, over-simplified model derivation, barely acceptable basic theoretical analyses, and plain discussion of results. - Poor idea, over-simplified model derivation, unacceptable preliminary theoretical analyses, and unclear discussion of results. - No idea, no model derivation, unacceptable no theoretical F analyses, or no discussion of results. Note: PhD/MPhil students are graded on a Pass/Fail basis. Grades A+ to D are considered as Pass, and grade F is considered as Fail.

3 Assessment Rubrics for Each Assessment A1 Participations A+ A A- B+ B B- C+ C C- D+ D F Extremely well Reasonably Not well prepared Not well prepared No preparation for prepared for prepared for for lectures. for lectures. lectures. lectures. lectures. A2 Assignments A+ A A- B+ B B- C+ C C- D+ D F poorly written homework almost perfect good accuracy, and fair level accuracy, acceptable or no submission. accuracy, and good satisfactory idea, and reasonable accuracy, and idea, model, model, economic idea, model, barely acceptable intuition, theoretical idea, model, theoretical analysis, analysis, and theoretical analysis, theoretical analysis, and discussions. discussions. and discussions. and discussions. A3 Examinations or reports Examinations may include three types of questions: multiple choice, calculation problems, and essay questions. Multiple choice and calculation problems are graded according to the marks assigned to each question. Essay questions and final reports are graded according to the following criteria: A+ A A- B+ B B- C+ C C- D+ D F No submission or assignments poor submitted novel research mediocre research poor idea, over- idea, over- idea, clean and idea, reasonable simplified model simplified model no idea, no model clever model model derivation, derivation, barely derivation, derivation, derivation, understandable acceptable unacceptable unacceptable outstanding reasonable basic theoretical preliminary no theoretical solid theoretical theoretical analyses, and plain theoretical analyses, or no analyses, and good analyses, and plain discussion of analyses, and discussion of discussions of discussion of results. unclear discussion results results results. of results.

4 COURSE CONTENT AND TENTATIVE TEACHING SCHEDULE Below is a tentative outline of topics covered in the course, as well as some of the relevant readings from the various texts. (Readings that are labeled with * are recommended but not required.) Lecture Introduction A. JC, Preface 1.2 Choice under Uncertainty: Expected Utility, Risk Aversion, and Stochastic Dominance A H&L, Chapters 1-2 B*. JI, 1 and 5 Lecture 2. Two-Period Consumption/Portfolio Problems A. JC, Chapter 1: Sections B*. JI, Chapter 3: pages Lecture 3. Law of One Price, No Arbitrage, and Stochastic Discount Factor (SDF) A. JC, Chapter 4 Lecture 4.. Equilibrium in a Complete Market: Pareto Optimality, Aggregation, and Consumption-Based Pricing Models A. JC, Chapters 2, 3 B. H&L, Sections , *, Lecture 5. Mean-Variance Efficiency and the Capital Asset Pricing Model (CAPM) A. JC, Chapter 5 B. H&L, Chapter 3, Lecture 6. Relation between Consumption-Based Pricing Models, Stochastic Discount Factors, Betas, and Mean-Variance Frontiers A. JC, Chapters 6, 7, (stop at page 155) Lecture 7. Asset Pricing in Multi-Period Securities Markets: Intertemporal Consumption/Portfolio Problems and the Intertemporal Capital Asset Pricing Model (ICAPM) A. JC, Chapters 6, 7, 9.1 (page 155)-9.3, 9.5 B. JI, Chapter 11 C*. H&L, Chapters 7, 8 Lecture Asymmetric Information in Financial Markets: An Introduction A. Xavier Vives, Information and Learning in Markets: The Impact of Market Microstructure. Princeton University Press, Princeton and Oxford, B*. Markus Brunnermeier, Asset Pricing Under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding, Oxford University Press, Lecture 8. Strategic Trading with Information Asymmetry in Financial Markets A. Albert S. Kyle (1985), Continuous Auctions and Insider Trading, Econometrica B. Michael J. Fishman and Kathleen M. Hagerty (1992), Insider Trading and the Efficiency of Stock Prices, The RAND Journal of Economics 23, Lecture 9. A Bid-Ask Spread Trading Model with Information Asymmetry in Financial Markets A. Maureen O Hara, Market Microstructure Theory Chapter 3 Lecture 10. A Competitive Trading Model with Information Asymmetry in Financial Markets A Sanford J. Grossman and Joseph E. Stiglitz (1980), On the Impossibility of Informationally Efficient Markets, American Economic Review 70, B. Martin F. Hellwig (1980), "On the Aggregation of Information in Competitive Markets," Journal of Economic Theory 22, C*. Anat R. Admati and Paul Pfleiderer (1986), A Monopolistic Market for Information, Journal of Economic Theory 39, D*. Anat R. Admati and Paul Pfleiderer (1990), Direct and Indirect Sale of Information,,Econometrica,

5 Vol. 58. Lecture 11. Introduction of Market Frictions in Financial Markets A. Dimitri Vayanos and Jiang Wang (2012), Theories of Liquidity, Foundations and Trends in Finance, 6, B. Dimitri Vayanos and Jiang Wang (2012), Liquidity and Asset Prices under Asymmetric Information and Imperfect Competition, Review of Financial Studies, 25, Lecture 12. The Interaction Between Financial Markets and Real Economy A. Sheridan Titman (2012), Financial Markets and Investment Externalities, The Journal of Finance The Presidential Address, VOL. LXVIII, NO. 4 AUGUST REQUIRED/RECOMMENDED READINGS & ONLINE MATERIALS (e.g. journals, textbooks, website addresses etc.) Upon instructors guidance The required textbook: 1. [JC] John H. Cochrane, Asset Pricing, Princeton University Press, February This book provides a nice, intuitive, and up-to-date treatment of some of the central ideas in asset pricing. Recommended reference books: 2. [H&L] Chi-Fu Huang, Robert H. Litzenberger, Foundations for Financial Economics,Prentice Hall, February Although standard text for this course for many years, this book has become somewhat obsolete. While it has reasonable coverage of many of the topics that we discuss in the early part of the course, it does not cover much of recent developments in asset pricing. 3. Vives, Xavier, Information and Learning in Markets: The Impact of Market Microstructure.Princeton University Press, Princeton and Oxford, This books provides up-to-date theories in information asymmetry. 4. Maureen O Hara, Market Microstructure Theory, Blackwell Publishing, [JI] John Ingersoll, Theory of Financial Decision Making, Rowman and Littlefield, Another classic introductory text, but like Huang and Litzenberger, this book is also somewhat outdated in its perspective. However, its well-organized and detailed treatment of the covered topics makes it a useful reference. 6. John Y. Campbell, Andrew W. Lo, and A. Craig MacKinlay, The Econometrics of FinancialMarkets, Princeton University Press, New Edition, December A great book for an empirical course, and includes summaries of several theoretical topics as well. The following three books are useful for continuous-time models: 7. Darrell Duffie, Dynamic Asset Pricing Theory, Princeton University Press, second edition, Robert C. Merton, Continuous-Time Finance, Wiley, John & Sons, Incorporated, Steven E. Shreve, Stochastic Calculus Models for Finance II: Continuous-Time Models(Springer Finance Series), Springer-Verlag New York, LLC, MEANS/PROCESSES FOR STUDENT FEEDBACK ON COURSE o conducting mid-term survey in additional to SETL around the end of the semester o Online response via Moodle site o Others: (please specify)

6 COURSE POLICY (e.g. plagiarism, academic honesty, attendance, etc.) Academic conduct: Students should refer to and be familiar with the provisions within the honor code about academic integrity in education and research. All submitted works (assignments, and exams) in this class must be original work. The University Regulations on academic dishonesty will be strictly enforced! Please check the University Statement on plagiarism on the web: Academic dishonesty is any act that misrepresents a person s own academic work or that compromises the academic work of another. It includes (but not limited to) cheating on assignments or examinations; plagiarizing, i.e., representing someone else s ideas as if they are one s own; sabotaging another s work. If students are caught in an act of academic dishonesty or misconduct, you will receive an F grade for the subject. The relevant Board of Examiners may impose other penalty in relation to the seriousness of the offense. ADDITIONAL COURSE INFORMATION (e.g. e-learning platforms & materials, penalty for late assignments, etc.) 1. Late submissions of assignments will not be accepted 2. Misbehaviors in classroom, reports, and exams are subject to penalty in participation grades.