EAE6058 - Economia Financeira I (2022)

This graduate course in Financial Economics I will cover theory and data. The course will focus on asset pricing literature in discrete time. It develops around 3 key ideas: (i) the relationship between consumption and returns (or macroeconomics and finance), (ii) properties in the time-series of aggregate returns (predictability of returns, efficient market hypothesis), (iii) properties in the cross-section of returns (why do different assets pay on average different returns?). Consumer-based asset pricing models will be studied. The empirical puzzles of the canonical model of this family (Lucas 1978, Mehra and Prescott 1985) justify more than 25 years of economic literature. We will go through this literature analyzing its relevant theoretical and empirical aspects. The predictability of aggregate returns will then be studied. This issue is related to the puzzles seen earlier, and predictability is a necessary ingredient for any model that seeks to explain such puzzles. It will be empirically investigated whether future returns are predictable, and whether the predictability of returns opposes the theoretical idea of efficient markets. Next, the literature is studied about the properties in the cross-section of recurrences. First, there will be several CAPM failures leading us to multifactorial models. These models have been proposed to explain why different assets pay different returns. Different models will be compared as to their ability to explain returns. To understand the literature in Financial Economics, it is crucial to understand how the theoretical models fail to fit the data. Some articles will be required as supplementary reading. Thus, at the end of the course, the student will be equipped to research asset pricing. In this position, the student should be able to propose a thesis problem, and visualize the solution to the common problems that arise in financial markets, for example, active and passive portfolio allocations, immunization of portfolios, and measurement of market risk, among others. Homework will be a crucial part of the course and include theoretical and empirical exercises.