SCHOOL OF MANAGEMENT

UNIVERSITY OF TEXAS AT DALLAS

Asset Pricing Theory
Valery Polkovnichenko FIN 7330, section 001
e-mail: polkovn@utdallas.edu Spring 2008
phone: (972) 883-5928 Meeting time and place:
Office: SOM 3.613 Thu 10:00-12:45 SOM 2.901
Office hours: stay after class and by appointment

SYLLABUS

OBJECTIVES
Finance 7330 is the first class in asset pricing finance. We will go over the essentials of modern asset
pricing theory. We will begin with basics of expected utility, portfolio choice problem and consumption-
savings problem. We will examine several classical models in finance – CAPM, consumption-based
model, APT. We will also introduce continuous-time modeling tools and use them in derivatives pricing.
The material will be structured along the textbook (see below).
PREREQUISITES
This is a Ph.D. sequence class and reasonable mathematical skills are expected at least at the upper
college level in the areas of linear algebra, multivariate calculus, optimization, probability and statis-
tics. In addition to mathematical requirements I assume the knowledge of at least the first semester
microeconomics (macro is not essential, but beneficial).
READINGS
Required Text: “Theory of Asset Pricing”, by George Pennacchi, 2007, Pearson/Addison Wesley.
Please read the chapters in advance, you will have a better idea of where we are going and have a
chance to ask questions on what you read.
Recommended Texts: “Asset Pricing”, John Cochrane, 2005, rev. ed., Princeton University press.
“Dynamic Asset Pricing Theory”, Darrel Duffie, 2001, 3d ed., Princeton University press
Papers: In addition to the book I will occasionally refer you to some papers or book chapters to
read. Since this is a first year class in finance, the class format is not supposed to be a reading class
(workshop), instead we will go mostly by the book. But some classical references will be required to
read and I will let you know in advance which.
HOMEWORK
There are 6 or 7 homeworks depending on how fast/slow we go. Mostly problems (from the book and
my collection). Due date is usually within 1-2 weeks.
FINAL EXAM
Final will be 3 hour open–everything. Tentatively on Thursday, April 24.
COURSE GRADE
The course grade will be based on 30% homeworks and 70% final exam.

TENTATIVE COURSE OUTLINE

I Essentials (Chapters 1-4)

Utilities, static portfolio choice problem. Mean-variance analysis. CAPM. Introduction to
consumption–based asset pricing.
II Financial Markets Equilibrium (Static) (Sections from Duffie’s book, to be distributed)
 Static equilibrium and absence of arbitrage. Pareto optimality, representative agent theorem.
III Multiperiod models (Chapters 5-6)
Dynamic asset pricing models. Classics: Lucas (1978). Calibration of asset pricing models and
the equity premium puzzle: Mehra and Prescott (1985).
IV The foundations of contingent claims pricing (Chapters 7-10)
Continuous time techniques, Ito lemma. Option pricing. No arbitrage pricing.
V Continuous time models of portfolio choice and dynamic asset pricing. (Chapters 12-13)
Merton’s models, ICAPM.
VI Asset pricing topics (time permitting): anomalies/puzzles/standing issues.
The equity premium puzzle. Cross section of returns. Non-standard utilities. Production-based
asset pricing.