FM503      One Unit
Asset Pricing for Research Students

This information is for the 2025/26 session.

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The course is divided into two parts, one relating to theoretical asset pricing and one to empirical asset pricing. In the theoretical part we begin with microeconomic models of market frictions such as, asymmetric information, costs of search and market participation, and leverage constraints, and models showing how the frictions affect equilibrium prices of stocks, bonds, and currencies. We then turn to macroeconomic models with informational, behavioural or other frictions, focusing on how the frictions contribute to the amplification of real shocks and lead to financial crises and persistent recessions. We also explore the welfare implications of these models.  

The second half of the course is an introduction to empirical asset pricing with a focus on stylized facts and the ability of asset-pricing theories to explain those findings. We first study single and multifactor models of the cross-section of average returns, focusing on the variety of methods that one can use to estimate and test such models. We next examine time-series predictability, with an emphasis on the present-value models that facilitate an understanding of those patterns, both in the aggregate and at the level of the firm. With that evidence and those methods in hand, we then study neoclassical extensions of the CAPM – including the Consumption CAPM (CCAPM), conditional versions of the CAPM and CCAPM, and the Intertemporal CAPM – that aim to explain those important stylized facts. Finally, we depart from the neoclassical paradigm, studying topics that include price-level tests of market efficiency, key findings related to institutional trading, demand-based asset pricing, behavioural and household finance and belief formation. 

30 hours of lectures in the Winter Term.
30 hours of lectures in the Autumn Term.

• Dimitri Vayanos and Jiang Wang, 2013, Market Liquidity; Theory and Empirical Evidence, in George Constantinides, Milton Harris and Rene Stulz (eds), Handbook of the Economics of Finance, North Holland. 

• Peter Kondor, 2025, Why are there Financial Crises? Recent Developments in Theory, Annual Review of Financial Economics, forthcoming. 

• Kenneth Singleton, 2006, Empirical Dynamic Asset Pricing, Princeton University Press 

• Andrei Shleifer, 2000, Inefficient Markets: An Introduction to Behavioral Finance, Clarendon Lectures in Economics, Oxford University Press. 

Continuous assessment (100%)