ECO 553 Financial Decisions under Risk 1
Jean-Marc Bourgeon
Course description:
This course is an introduction to the economic analysis of uncertainty and financial markets. It addresses the problem of intertemporal choices under uncertainty and its application to financial markets. The first part presents the economic analysis of intertemporal choice and the determination of interest rates under certainty and then under risk. The definition of preferences under uncertainty is discussed, along with the measures of risk and the optimal sharing of risk among the individuals in an economy. The second part presents the economic approach to financial markets and the valuation of financial assets by applying the no-arbitrage approach. The Capital Asset Pricing Model (CAPM) is then discussed. An introduction to option pricing (discrete and continuous time approaches) is also given.
Program:
Introduction to Finance.
Term structure of interest rates. Determinants of interest rates.
Choice under uncertainty. Risk aversion, prudence, stochastic dominance.
Optimal risk-sharing. The mutuality principal
Financial markets and arbitrage valuation.
Mean variance utility and CAPM.
Introduction to option pricing
Textbooks:
Demange, Gabrielle, and Guy Laroque. "Finance and the Economics of Uncertainty." (2005).
Duffie, Darrell. Dynamic asset pricing theory. Princeton University Press, 2010.
Cochrane, John H. Asset Pricing,. Princeton university press, 2009.
Gollier, C. (2004). The economics of risk and time. MIT press.
- Teaching coordinator: Bourgeon Jean-Marc