FINANCIAL ECONOMICS (金融经济学大纲)

Ignacio Palacios-Huerta E CONOMICS244

MW

Economics

8:30-9:50 of

Department

2002 University Spring

Brown

FINANCIAL ECONOMICS

This course is intended for Ph.D. students interested in economics and finance. The course presumes previous exposure to undergraduate economics, econometrics and statistics. The accent and intent of this course is to take the student to the frontier of our knowledge in theoretical and, especially, empirical asset pricing finance and to let him/her understand and enjoy the exciting time that academic researchers and high-tech practitioners in this area are enjoying right now. Over the last decade much progress has been made to answer the fundamental questions in macroeconomics and finance. However, the central task of absolute asset pricing finance, which is to understand and measure the sources of aggregate or macroeconomic risk that drive asset prices, is unfinished. Although much empirical work has documented tantalizing stylized facts and links between economic variables and finance, the theory lags behind and we do not have yet a complete model that explains, as opposed to describes, the rich body of empirical evidence. Novel theories and empirical work are subject to a great demand in this field.

The course is stated mostly in a discount factor language and is often translated in the traditional expected return-beta or mean-variance language. The major advantages of this approach, common in current academic research, are its universality and simplicity. The accent of the course is on understanding statements of theory, and working with that theory to applications, rather than rigorous or general proofs. The course focuses, in its second part, on current academic research and thus offers a fertile ground of ideas for students that are or may be interested in doing graduate thesis in finance, microeconomics (preference formation), macroeconomics, international economics and applied econometrics dissertation topics. The course goes very lightly over many parts of asset pricing theory that have faded from current applications and are not a cornerstone of modern asset pricing, although they occupied large amounts of attention in the past.

Lecture Notes and Readings. The initial part of the course is based on lecture notes. I will distribute most of my own notes. The rest of the course is highly intensive in reading and evaluating several academic papers. Those marked with an asterisk (*) in the enclosed list are required readings for a complete understanding of all material covered in the course. All others are suggested and intended to be additional references to various parts of the course. As the course goes along other relevant papers may be distributed either as required or suggested readings.

No single book covers the material in this course. However, various chapters of the book by John Campbell, Andrew Lo and A.C. MacKinlay, The Econometrics of Financial Markets, Princeton University Press, 1997, are directly related to various parts of the course. In any event, it is an excellent book worth owning. The book Asset Pricing, by John Cochrane, Princeton University Press, 2001, is highly recommended. It will be particularly useful for the first part of the course.