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IB9110 Asset Pricing and Risk



  • Lectures: 20 hours.
  • Seminars/tutorials: 9 hours.


Financial Markets, Principles of Arbitrage and Valuation

  • Modelling financial markets in one period Trading strategies and arbitrage opportunitiesStochastic discount factor and equivalent martingale measure. The fundamental theorem of asset pricing. Contingent claims, complete and incomplete markets
  • Dynamic models in multiple periods Self-financing strategies. Valuation and hedging in complete markets. Sources of
    incompleteness, approaches to valuation in incomplete markets

Modelling and Measuring Risk

  • Different types of risk (operational, financial, market, credit, liquidity)
  • Traditional approach and shortcomings
  • Alternative approaches to modelling/measuring risk convex and coherent measuresValue-at-Risk (VaR), expected shortfall further measures
  • Problems with empirical implementation

Decision-Marking under Uncertainty (Utility Theory)

  • Traditional (von Neumann-Morgenstern) theory Lotteries and preference relations. Utility representation. Risk aversion and risk premium. Representative agents in complete markets
  • Shortcomings of traditional theory and Alternatives Behavioural and cognitive biasesLoss aversion and prospect theory

Portfolio Allocation and Factor Models

  • Single-Factor Models Mean-variance optimisation without a risk-free assetMean-variance optimisation with a risk-free asset. Tangency portfolio and capital markets line. Equilibrium and Capital Asset Pricing Model (CAPM)Tests and critiques of the CAPM
  • General (Multi-)Factor Models General framework, factors and risk premiaSpecific examples (Fama-French, Carhart)Arbitrage-Pricing Theory (APT)


  • Class Test 20%
  • Group Project 20%
  • Examination 1.5 hours 60%

Illustrative Bibliography:

Cochrane, J.H. (2001): “Asset Pricing” (2nd “revised” ed.) Princeton University Press

Campbell, J.Y. (2018): “Financial Decisions & Markets: A Course in Asset Pricing” Princeton University Press

Dumas, B. and E. Luciano (2017): “The Economics of Continuous-Time Finance” MIT Press

Föllmer, H. and A. Schied (2016): “Stochastic Finance” (4th ed.) Walter deGruyter, Berlin

McNeil, A., P. Embrechts, and R. Frey (2015): “Quantitative Risk Management” (2nd ed.) Cambridge University Press

Examination Period: January