Seminar: Asset Prices and Financial Markets (F)

This seminar is intended to give students the opportunity to explore in greater detail and possibly also extend some of the models and topics introduced in other finance courses offered by the department. Students are expected to write a paper falling within one of the following four categories: Asset Pricing, Portfolio Theory, Pricing of Derivatives, The Term Structure of Interest Rates and Interest Rate Derivatives. The courses in microeconomics and the courses: Financial Decision Making, Financial Econometrics A and B as well as Advanced Empirical Finance are particularly relevant for students writing within either “Asset Pricing” or “Portfolio Theory”. The courses Financial Econometrics A and B, Advanced Empirical Finance, Financial Theory and Models, and Pricing Financial Assets are particularly relevant to students writing within “Pricing of Derivatives “. Finally, the courses Financial Theory and Models, and Fixed Income Derivatives: Risk Management and Financial Institutions are relevant should students writing within “The Term Structure of Interest Rates and Interest Rate Derivatives”.

The aim of this seminar is to introduce students to a wide range of the most important models used by academics and practitioners alike to describe the behavior of financial markets. During the semester, students will choose a particular model and write a paper exploring the details and most important aspects of this model. Students are free to decide if they wish to pursue a purely theoretical approach or if they also wish to do some empirical analysis using a software and/or programming language of their choice. Students are expected to choose a model falling within one of the following four categories: Asset Pricing, Portfolio Theory, Pricing of Derivatives, The Term Structure of Interest Rates and Interest Rate Derivatives. Throughout this semester, we will examine some of the most important topics in finance and discuss how best to model financial markets. We will discuss theoretical aspects of these models, how they can be implemented in practice as well as the model´s ability to capture the behavior of financial markets in practice. During the first two weeks of the semester, students will be given an overview of each of the four topics including relevant literature so that students will better be able to choose a topic for their paper. Below is a list of the four categories mentioned above including some topics within each category that can be discussed in a seminar paper.

Asset Pricing
The CAPM model and its various extensions, multi-factor models, asset return predictability and the efficient market hypothesis, consumption based asset pricing.

Portfolio theory
Optimal portfolio allocation in a static setting, optimal portfolio choice in a dynamic setting, optimal portfolio choice in consumption based models, portfolio risk and dynamic hedging, stochastic optimal control.

Pricing of Derivatives
Stochastic volatility models, jump-diffusion models, local volatility models, implied volatility, fitting option pricing models to market data, dynamic market models, numerical computation of option prices (Monte Carlo simulation, tree based methods, numerical solution of the relevant PDE/ODE or Fourier methods), complex derivatives (American options, Asian options, barrier options, look-back options).

Term Structure of Interest Rates and Interest Rate Derivatives
Models for the term structure of interest rates, short rate models (Vasicek, Ho-Lee, Black-Derman-Toy, CIR or Hull-White), forward rate models (HJM), interest rate derivatives (caps, floors or swaptions).