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Academic Term (Anno Accademico) 2019/2020: financial economics

  • Teaching load: 63 hours (ECTS credits 9)
  • Lecturers: BOTTAZZI Giulio, GIACHINI Daniele
  • Teaching Assistant:
  • Semester: Fall
  • Outline: This course aims to provide a modern theoretical foundation to the most widespread notions and tools in financial economics, including present value theory, real interest rate, arbitrage pricing, portfolio management and mean-variance analysis.
  • Objectives: The students should become acquainted with the notion of arbitrage and equilibrium price in different market settings. They should be able to solve the problem of portfolio optimization and mean-variance analysis in rather general terms.
  • Description: General equilibrium, no arbitrage in riskless economies, real interest rate and the yield curve. Arbitrage in security markets, state prices, complete and incomplete markets, valuation functional and the fundamental theorem of finance. Choices under uncertainty, expected utility theory and risk aversion. Portfolio choices, optimal portfolio with multiple risky assets. General equilibrium under uncertainty. Pricing kernel and mean-variance analysis. OPTIONAL: behavioral finance, asset prices under ambiguity, evolutionary finance and the market selection hypothesis.
  • Textbooks:
    [LRW]
    Principles of Financial Economics, S.F. LeRoy and J. Werner (1st edition)
    [FBJ]
    Foundations of Financial Markets and Institutions, Fabozzi, Modigliani and Jones
  • Further references and Optional readings:
    [MWG]
    Microeconomic Theory, A. Mas-Colell, M. D. Whinston, and J. R. Green
    [CN]
    Quantitative Financial Economics, K. Cuthbertson and D. Nitzsche
    [HR]
    Financial Economics, T. Hens and M. O. Rieger
    [ES]
    Ambiguity and Asset Markets, L. G. Epstein and M. Schneider, NBER paper;
    [Hu]
    Options, Futures and Other Derivatives, J. C. Hull (7th ed.)
    [Ni]
    The Ascent of Money: A Financial History of the World, Niall Ferguson
    [Eco]
    Guide to the Financial Markets, The Economist
  • Prerequisites: The course requires a basic knowledge of linear algebra (linear space, linear map, basis, inversion, eigenvectors and eigensystems), calculus (differential analyses of function of many real variables and static optimization) and, to a lesser extent, probability theory. Some basic knowledge of the theory of choice under uncertainty (utility theory) and economic equilibrium are in general given for granted and only cursorily reviewed.
  • Prerequisites suggested reading (relevant chapters in): C. P. Simon, L. E. Blume, Mathematics for Economists, H. R. Varian Microeconomic Analysis.
  • Keywords: financial economics, general equilibrium, arbitrage, asset pricing, optimization
  • Final exam: the get the final grading students are required to pass a final written exam. At least one fake exam will be organized to test your level of preparation. Students get extra points for completing their homework during the course.
  • Calendar: check "Financial Economics" entries for the lectures timetable and locations in the calendar.

List of lectures. To have a guess about future lectures check the previous years but consider that your mileage may vary.

  1. (23/09/2019, Bottazzi) Introduction: the structure of the course and its textbooks; the role of financial institutions slides (Textbooks sections: [FBJ] Ch. 1, 2 and 3; [Ni] Ch. 1; [Eco] Ch. 1)
  2. (24/09/2019, Bottazzi) Barter and market economies; Two agents, two goods, one date model. Two date model. Spot and forward markets.
  3. (25/09/2019, Bottazzi) Financial equilibrium. The role of arbitrage in setting prices. Introduction to present value model.
  4. (30/09/2019, Bottazzi) Present value prices and economic equilibrium. Redundant contracts. Real and nominal interest rates; The role of inflation; Pricing of forward contracts. (Textbooks sections: [FBJ] Ch. 4 and 5 [Hu] Sections from 4.1 to 4.8 all Chapter 5 and section from 6.1 to 6.3 [Ni] Ch. 2) [Assignment 1]
  5. (01/10/2019, Bottazzi) Forward interest rate. Inter-temporal allocation in a one good two date model: the role of preferences and endowments in setting real interest rates.
  6. (02/10/2019, Bottazzi) Structure of security markets with uncertainty; complete markets and redundant assets. Left and right matrix inverse. (Textbook sections: [LRW] 1.6)
  7. (07/10/2019, Bottazzi) Payoff pricing correspondence; the Law of One Price; state claims and state prices (Textbook sections: [LRW] 2.1, 2.3, 2.4, 2.5)
  8. (08/10/2019, Bottazzi) Arbitrage and valuation: strong and weak arbitrage; positive pricing; the payoffs convex cone; (Textbook sections: [LRW] 3.2, 3.3, 3.4, 3.5, 5.1)
  9. (09/10/2019, Bottazzi) Farkas' Lemma; the valuation functional and strong arbitrage; Stiemke's Lemma; the valuation functional and arbitrage; Arbitrage and valuation: the fundamental theorem of finance; multiplicity of valuation functionals; risk neutral probabilities; (Textbook sections: [LRW] 5.2, 5.3, 5.5, 6.3, 6.4, 6.5;6.6, 6.7;) [Assignment 2]
  10. (14/10/2019, Giachini) Examples of payoff pricing function and no-arbitrage pricing. Discussion of the no-arbitrage condition in a general two date model.
  11. (15/10/2019, Giachini) Solution of Assignment 1.
  12. (16/10/2019, Giachini) Valuation of derivatives in a two date model: forward and future (see the discussion of forward and future contracts in [Hu] Ch.1-3)
  13. (21/10/2019, Giachini) Valuation of derivatives in a two date model: call and put options. Choices under uncertainty: consumption and portfolio choices, Expected Utility Theory, separable and time invariant utilities; risk aversion; absolute and relative risk aversion coefficients; certainty equivalent; (Textbook sections: [LRW] 9.2, 9.3, 9.4, 9.5, 9.6, 9.8)
  14. (23/10/2019, Giachini) Concave transformation; comparison of utility functions; first and second order stochastic dominance; (Textbook sections: the proves of the theorems can also be found in [MWG] Ch.6 Sec.B; further examples are discussed in [CN] Ch.1 Sec.3-5)
  15. (28/10/2019, Giachini) Exercises and solutions of Assignment 2
  16. (29/10/2019, Giachini) Portfolio optimization: first order conditions; arbitrage and optimal portfolio, optimal consumption, prices and returns. (Textbook sections: [LRW] 1.4, 1.5, 2.6, 3.6, 11.1, 11.2; see [CN] Ch.15 for an introductory discussion of the problem)
  17. (30/10/2019, Giachini) Portfolio optimization: Example of internal and boundary solutions. Marginal utility and risk-neutral probabilities. [Assignment 3]
  18. (4/11/2019, Giachini) Portfolio optimization with one risky security: impact of wealth on optimal investment; exercises (Textbook sections: [LRW] 12.2).
  19. (5/11/2019, Bottazzi) Exercises and solution. Strategies of portfolio optimization.
  20. (6/11/2019, Bottazzi) Scalar product, Gram–Schmidt procedure, orthogonal complement and orthogonal projection. Portfolio optimization with several risky securities: from consumption to investment optimization; risk-return trade off; optimal portfolio under fair pricing. (Textbook sections: [LRW] 13.2, 13.3, 13.4)
  21. (11/11/2019, Bottazzi) Portfolio optimization with several risky securities: Linear Risk tolerance. (Textbook sections: [LRW] 9.9, 13.6)
  22. (12/11/2019, Bottazzi) Expectations kernel and pricing kernel (Textbook sections: [LRW] from 17.1 to 17.10, 18.5)
  23. (13/11/2019, Bottazzi) Mean-variance frontier payoffs and mean-variance frontier returns with complete markets. (Textbook sections: 18.1, 18.2 and Th. 18.2.1 with proof 18.4, 18.6; see also the discussion in [CN] Ch.15 Sec.1-2).
  24. (19/11/2019, Giachini) Mean-variance frontier payoffs and mean-variance frontier returns with incomplete markets. (Textbook sections: 18.1, 18.2 and Th. 18.2.1 with proof 18.4, 18.6; see also the discussion in [CN] Ch.15 Sec.1-2).
  25. (20/11/2019, Giachini) Zero-Covariance Frontier Returns, Sharpe Ratio of mean-variance frontier returns (Textbook sections: 18.4) [Assignment 4, see below for data]
  26. (21/11/2019, Giachini) Exercises and solutions of Assignment 3
  27. (25/11/2019, Bottazzi) Economic equilibrium; representative agent model; equilibrium sufficient conditions; equilibrium and arbitrage. (Textbook sections: [LRW] 1.7, 1.8, 1.9, 2.4, 3.7) [Assignment 5]
  28. (27/11/2019, Bottazzi) An example of general equilibrium with heterogeneous agents. The relation between individual wealth and prevailing prices.
  29. (2/12/2019, Bottazzi) Exercises and solutions of Assignment 4.
  30. (3/12/2019, Bottazzi) Consumption based security pricing; a first derivation of CAPM;, (Textbook sections: [LRW] 14.1, 14.2, 14.3, 14.5)
  31. (4/12/2019, Bottazzi) Equilibrium and Pareto optimal allocation, first and second welfare theorem; (Textbook sections: [LRW] 15.2, 15.3, 15.4, 15.5 without theorem 15.5.1, 15.6 )
  32. (10/12/2019, Giachini) Exercises and solutions of Assignment 5.
  33. (11/12/2019, Giachini) Mock Exam and solutions.

Data for Assignment 4: weekly closing prices of America Corporation (BAC), General Electric Company (GE), Ford Motor Co. (F), Citigroup, Inc. (C), Pfizer Inc. (PFE), Hewlett-Packard Company (HPQ), JPMorgan Chase & Co. (JPM), AT&T, Inc. (T), Wells Fargo & Company (WFC) and J. C. Penney Company, Inc. (JCP)

Academic Term (Anno Accademico) 2019/2020: advanced calculus

The aim of the course is to provide a deepest introduction to the basic tools and theorems of mathematical calculus. Undergraduate courses are oriented to provide a specific set of computational procedures to be applied to the solution of specific problems. The present course might constitute a good complement as it is more concerned with the definition and study of general notions and it is characterized by a theorem-proving approach.

  • Teaching load: 40 hours (ECTS credits 4)
  • Lecturer : BOTTAZZI Giulio, BATTISTON Pietro
  • Semester: Fall
  • Textbook: Notes directly provided by the teacher
  • Further references and Optional readings: Principles of Mathematical Analysis, W.A. Rudin, chapters 3, 6 and 9
  • Prerequisites: The course requires some knowledge of linear algebra (linear space, linear map, basis, determinant, inversion, eigenvectors) and basic calculus.

List of topics covered by the lectures.

Functions of several real variables:

  • Continuity in Euclidean spaces
  • Derivative and differential
  • Concavity and convexity
  • Local and global maxima and minima
  • Implicit function theorem
  • Theorems of alternatives
  • Constrained maximization
  • Khun-Tucker conditions

Riemann and Steltjes integral:

  • Finite sum and limits
  • Summability conditions
  • Properties of the integral

Measure theory:

  • Sigma algebra, measurable space, measure
  • Measurable function
  • Borel sigma algrebra, outer measure, Lebesgue measure
  • Lebesgue integral
  • Product measure and multiple integral

Author: Giulio Bottazzi

Created: 2019-12-10 Tue 09:39

Emacs 25.2.2 (Org mode 8.2.10)

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