Week 1Help Center

This week is a review covering some basic concepts in stochastic calculus and time-series processes. Skim if you know this material well.

Schedule
All assignments due: 12:00 midnight GMT Sunday, Jan 25, 2015.

Reading
Required

Continuous-Time Notes 2.2-2.4 (p. 13-24)

Optional or background reading;

Asset Pricing: Preface

Investments Notes. A review of my introductory class for MBAs. Useful cultural background and reference.

Time series notes This is a book-length introduction to time series in discrete time. You don't need all of it here but it is one place to find the
basics

Lectures & Quizzes

Each lecture is required; most have required quizzes as well. You can download a pdf version of the whiteboards from this week's lectures here.
You can try the quizzes up to three times. Your grades are 100%, 90%, 80% on the three tries. You get the best of the three grades.
Lecture (required)
Diffusions & Diffusion Models (12:20)

Q&A (optional)

Quiz (required)
attempt

Aaron/Kaylea: Ito's Lemma & Stochastic Calculus (2:59)

Ito's Lemma (8:27)

attempt

Aaron: Variances (5:13)

Solving Stochastic Differential Equations (12:43)

Assignments
Each homework assignment has a practice version that you can attempt twice. Only the final version, which you can attempt once, counts toward your
grade.
The final version has answers that are useful to read.
Assignment

Practice (optional)

Final (required)

Horizon Effects in Returns

practice

attempt

Lognormal Returns

practice

attempt

Meet the Data: Returns and Return Forecasts

practice

attempt

Week 2Help Center

This week will be an overview of asset pricing facts and the basic theory that we will expand on throughout the course.

Schedule
All assignments due: 12:00 midnight GMT Sunday February 1.

Reading
Required

Asset Pricing Ch. 20: Introduction (p. 389-393); Section 20.1 (p. 391-395 only); Section 20.2 (p. 435-448 only).

Discount rates (p. 1047-1048; 1051-1053; 1058-1063).

Fama, Eugene F. and Kenneth R. French, 1996, Multifactor explanations of asset pricing anomalies," Journal of Finance 51, 55-84. Read
p. 55-60.
Asset Pricing Ch. 1. (Ch. 1 is available free at Princeton University Press.)

Optional

Discount rates video from the AFA annual meetings. Also, slides for the video.

Financial Markets and the Real Economy Sections 1 and 2 (p. 237-257). Note: If you are unable to access this article here, check Google
for the full book. The article in question is chapter 7.

Lectures & Quizzes

Each lecture is required; so are the quizzes. You can try the quizzes up to three times. Your grades are 100%, 90%, 80% on the three tries. You get the
best of the three grades.
You can download a pdf version of the whiteboards from this week's lectures here.
Lecture (required)

Quiz (required)

Part 1: Facts
Equity Premium and Risk (13:15)

attempt

Time Varying Risk Premium (10:54)

The Cross Section of Stock Returns (9:39)

attempt

Summary of Facts (4:14)

Part 2: An Overview of Asset Pricing Theory
A Preview of Asset Pricing Theory (4:12)
Understanding P = E(Mx) (13:11)

attempt

Assignments
Each homework assignment has a practice version that you can attempt twice. Only the final version, which you can attempt once, counts toward your
grade.
Assignment

Practice (optional)

Final (required)

A Little Model of Time-Varying Expected Returns

practice

attempt

Meet the Binomial Model

practice

attempt

Week 3Help Center

This week we'll cover some of the classic issues in finance.

Schedule
All assignments due: 12:00 midnight GMT Sunday February 8

Reading
Required

Short Review of Efficiency (introduction for Gene Fama)

Asset Pricing Ch. 2

Reference

Asset Prices in An Exchange Economy. This is the famous paper that launched the consumption-based model and endowment-economy
framework.

Lectures & Quizzes

Each lecture is required; most have required quizzes as well. You can download a pdf version of the whiteboards from this week's lectures here.
Lecture (required)

Q&A (optional)

Quiz (required)

Overview (3:00)
Meet the Players, part. 1 (8:00)

Ben: Stocks that don't Pay Dividends? (1:17)

attempt

Ben: What about Reality? (2:45)

attempt

Meet the Players, part. 2 (7:19)

Risk Free Rate and Macroeconomics (8:17)
Consumption and Risk Premiums (9:10)

attempt

Risk Premiums & Betas (8:23)

attempt

Mean Variance Frontier and Roll Theorem (7:51)

Ben: Where is the Hyperbola? (1:36)

attempt

Random Walks & Time-Varying Risk Premiums (9:06)

attempt

General Equilibrium and Causality (10:21)

attempt

Summary (3:35)

Assignments
Like the quizzes, each homework assignment has a practice version that you can attempt twice. Only the final version, which you can attempt once, is
graded.
Assignment
Habits
Leisure

Practice (optional)

Final (required)

practice

attempt

practice

attempt

The Equity-Premium/Risk-Free-Rate Puzzle

practice

attempt

Week 4Help Center

This week we'll look at the discount factor in more detail.

Schedule
All assignments due: 12:00 midnight GMT Sunday February 15

Reading
Required

Asset Pricing: chapters 3-4.

Optional

The Role of Conditioning Information in Deducing Testable Restrictions Implied by Dynamic Asset Pricing Models. This is the paper that
sets out all of the state space stuff, and the conditional vs. unconditional mean variance frontier. It has all the assumptions and the proofs. Very
dense, and I mean that as a compliment.

Lectures & Quizzes

Each lecture is required; most have required quizzes as well.
You can download a pdf version of the whiteboards from this week's lectures here.

Lecture (required)

Q&A (optional)

Quiz (required)

Part 1: Contingent Claims, State Prices, Risk-Neutral Probabilities

States & Complete Markets (7:05)

Ben: Does S have to be Finite? (1:18)

attempt

Aaron: Uniqueness (1:06)

attempt

Discount Factor in Complete Markets (3:06)

Risk-Neutral Probabilities in Complete Markets (4:06)
Investors in Complete Markets (5:25)

attempt

Risk-Sharing in Complete Markets (4:29)

attempt

State-Space Geometry (5:42)

attempt

Complete-Markets Summary (2:56)

Part 2: Incomplete Markets
Discount Factor in Incomplete Markets (8:38)
Theorem 1: What It Does and Does Not Say (3:48)
Positive M & Arbitrage (4:16)
Theorem 2: What It Does and Does Not Say (2:42)

attempt

Formulas for X* (7:20)

attempt

Assignments
Each homework assignment has a practice version that you can attempt twice. Only the final version, which you can attempt once, is graded.
Assignment
Three Ways to Price an Option

Week 5Help Center

Practice (optional)

Final (required)

practice

attempt

This week we'll cover the mean-variance frontier, beta representations, the relationship between the discount factor, mean-variance and beta
representations, and conditioning information.

Schedule
All assignments due: 12:00 midnight GMT Sunday February 22.

Reading
Required

Asset Pricing chapters 5, 6.1-6.4, 7, and 8.1-8.2.

Optional

The Role of Conditioning Information in Deducing Testable Restrictions Implied by Dynamic Asset Pricing Models. This was relevant for
the material in week 3 and remains relevant for week 4. Still optional, as it's very dense.

Each lecture is required; most have required quizzes as well.

You can download a pdf version of the whiteboards from this week's lectures here.

Lecture (required)

Q&A (optional)

Quiz (required)

Part 1: Mean-Variance Frontier

Classic Approach (6:59)

attempt

State-Space [Hansen-Richard] Approach (9:06)

Comparing Frontiers (5:24)

Aaron (1:55)
Ben (1:46)
Aaron, again (1:19)
Jung Ho (2:32)

attempt

Roll Theorem (5:29)

attempt

Part 2: Implications of the Existence and Equivalence Theorems

Summary and Implications (2:54)

attempt

History and Representation (5:14)

attempt

Fishing (4:26)
Mimicking Portfolio Theorem & Fishing (4:57)

attempt

Part 3: Conditioning Information

Conditioning Down (5:42)
Instruments & Managed Portfolios (5:21)

Jung Ho (1:39)

Conditional & Unconditional Models (8:24)

Ben (2:13)

Assignments
Each homework assignment has a practice version that you can attempt twice. Only the final version, which you can attempt once, is graded.
Assignment

Practice (optional)

Final (required)

Mean-Variance Frontier

practice

attempt

Conditional and Unconditional Frontiers

practice

attempt

ek 6Help Center
This week we'll cover the some of the common factor models used in asset pricing: the Capital Asset Pricing Model (CAPM), the Intertemporal Capital
Asset Pricing Model (ICAPM), the Arbitrage Pricing Theory (APT), and how they relate to each other.

Schedule

All assignments due: 12:00 midnight GMT Sunday March 1.

Reading
Required

Asset Pricing ch.9.

Optional

Fama and French, 1996, "Multifactor Explanations of Asset Pricing Anomalies", p. 55-84. Read the rest of the paper. Skip section V, 68-75.

Each lecture is required; so are quizzes. You can try the quizzes up to three times. Your grades are 100%, 90%, 80% on the three tries. You get the best of
the three grades.
You can download a pdf version of the whiteboards from this week's lectures here.

Lecture (required)

Q&A (optional)

Introduction/Overview (8:32)

Quiz (required)
attempt

CAPM / Simple 2-Period Quadratic (4:12)

Aaron (1:08)

CAPM: Derivation with Log Utility or IID Consumption Growth

Alex (1:47)

ICAPM / State Variables (7:19)

Alex (1:45)

Multifactor Models - Outside Income (4:10)

attempt
attempt

Multifactor Models - Portfolio Intuition (5:19)

Intertemporal Example (3:23)

Aaron (1:52)

Multifactor Models U Intuition, Macro, Mimicking Portfolios (3:39)

Comments (9:38)

attempt

APT (Arbitrage Pricing Theory) (5:54)

APT vs Equilibrium Models (CAPM) (10:13)

attempt

Assignments
Each homework assignment has a practice version that you can attempt twice. Only the final version, which you can attempt once, is graded.
Assignment

Practice (optional)

Final (required)

Factor models

practice

attempt

Week 7Help Center

This week we'll discuss the Generalized Method of Moments. How do you estimate alphas, betas, and lambdas; how do you evaluate if models are
any good? GMM is a very flexible econometric framework for lots of problems, and we'll also explore that a bit.

Schedule

All assignments due: 12:00 midnight GMT Sunday March 8.

Reading

Required
o

Asset Pricing Chapter 11

Asset Pricing Chapter 12

Optional
o

Hansen, Lars Peter, 1982, Large Sample Properties of Generalized Method of Moments Estimators Econometrica 50, 1029-1054.

Hansen, Lars Peter and Kenneth J. Singleton, 1982, Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations
Models Econometrica 50, 1269-1286.

Cochrane, John H. GMM Notes

Cochrane, John H., A Brief Parable of Overdifferencing

Guide to the optional readings:

o

Hansen 1982 is The Article that defines GMM. Read it (at least) three times. The first time through, just understand the notation and
the statement of the theorems. Find the GMM estimate defined, standard errors, test statistics. Get ready to use GMM. The second time
through, read the "if" part of the proofs. Understand the stationarity, ergodicity, etc. assumptions. They matter! Finally, try to read the proofs.
Hansen and Singleton (1982) is the crucial application to the consumption based model.

GMM Notes is a written version of my notes for the lectures. It's not exactly one to one, I condensed the lectures. The lectures and
pdfs of the whiteboards should be enough. This is one place to turn if those are confusing, and hence just an optional resource.

The Brief Parable of Overdifferencing is a good example for the "Choosing a W matrix" lecture, showing you how statistical
efficiency can lead to bad estimators.

Lectures, quizzes and homeworks are required.

You can download a pdf version of the whiteboards from this week's lectures here.
Lecture (required)

Quiz (required)

Standard Error of the Mean (6:45)

attempt

GMM Estimation (8:35)

attempt

GMM distribution (9:34)

attempt

Efficient GMM (7:01)

attempt

GMM Does OLS (6:35)

attempt

Choosing a W matrix (9:16)

S Matrix Dangers (5:14)

S Matrix Dangers, Part 2 (1:54)

Assignments
Each homework assignment has a practice version that you can attempt twice. Only the final version, which you can attempt once, is graded.
Assignment

Practice (optional)

Final (required)

GMM and Consumption Part 1

practice

attempt

GMM and Consumption Part 2

practice

attempt