Website for 35904 Asset Pricing

John H. Cochrane, Fall 2013

Last update 1/13/2014

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This course is a survey of asset pricing theory, emphasizing a discount-factor and GMM approach. The discount factor is a unifying framework: p=E(mx) covers everything, stocks, bonds, options, real investments, discrete time, continuous time, asset pricing, portfolio theory, etc.

I. Announcements:

9/22: The coursera site is up. Please do week 0 including all quizzes, report any typos to Aaron and Paymon. Make sure you view the week 1 facts video (at least) before coming to class Monday morning. I will not go over video material! Each day, come to class with one question on that day's material. I'm trying to figure out how to turn a "lecture" class into a "discussion" class, and I'll try simply calling on you to spark that discussion.

Class meets MW 3:10-4:30 HC 3B. The first class is Monday Sept 30. The final exam is Wed Dec 11 3-6 also HC3B. You must take the exam, and you must take it at this time. Don't tell me you need to take it early because you've already booked your tickets to Fiji.

The TAs for the class are Aaron Pancost and Paymon Khorrami There will be a review session Fridays 12:15-1:45 in 3B

Please send me an email if you are going to take the class, but will not be registered as a Booth student (or even if you are, just to be sure). I want to build an email list of students in the class so I can send announcements.

II. Course Policies

Prerequisites. I design the course for Booth PhD students who have taken a year of PhD level economics and econometrics. I also plan for economics department students who have taken the core exam. I encourage students to take 35901 (Fama) before or with this class. Facts motivate theory, and that background will make all this fall into place much better.

You should have some Ph.D.-level macroeconomics, finance or statistics/econometrics before taking this course. I will use without much fanfare concepts like utility maximization, a representative consumer and dynamic program; expected returns, betas, and random walks; and basic time series tools like autocorrelations, ARMA and VAR models, and simple continuous-time diffusion models. Of course, I presume you can use single and multivariable calculus, simple differential equations, matrix algebra, and basic statistics. MBA students are welcome, with the understanding that the course assumes the above background. You will do some simple programming. You will need to use a matrix programming language like Matlab, Octave, R, Python, etc.

Suggestions for background reading. You need to be comfortable with time series mechanics. My Time series notes are a more leisurely refresher of discrete-time time-series mechanics. For continuous time, read the  Continuous time review notes for a quick refresher on dz and dt. I will use dz and dt and Ito's lemma on the first day, so make sure you understand this. (I won’t use the forward and backward equations right away.) If you don't know any finance at all, you may find my investments review notes are useful. This is a review of MBA level investments Though not a prerequisite, if you've heard about a stock, bond, rate of return, CAPM, random walk, and efficent market, this class will make more sense to you.

Course requirements. 1) Show up, do the indicated readings, and participate in class discussion. 2) Do problem sets. 3) Take a final exam.

4) Starting Fall 2013, this class will be integrated with a Coursera online class. You are required to sign up for, participate in, and complete and pass the Coursera course. Our in-class experience will build on the Coursera materials. You are also going to be my test cases for the Coursera materials.

I may have some of our class discussions filmed for the online course. If you have an objection to being filmed, let me know.


Bring a name card and use it. If you don’t bring a name card to class and get your picture in the Booth facebook, don’t complain that faculty don’t know who you are.

You may talk as much as you like and help each other on problem sets, but I expect everyone to actually do the work and write their answers. MBAs may work in groups. You may not hand in problem sets late.

There is one required text: Asset Pricing, Princeton University Press. I recommend the Revised Edition since I got rid of the typos, but you can use the first edition if you already have it and want to save some money. Here’s the Typo list for first edition of Asset Pricing. (If you’re using the Revised edition, these have all been fixed) The list below includes some references, which are the "classic originals" you should at least know about. Some other references are papers that I will lecture on, but do not require you to read the whole paper from beginning to end. I will also post occasional notes here when my lectures stray from the book.

Over the course of the quarter we will also read two other more recent summaries,

Cochrane, John H., 2011, Discount rates Journal of Finance 66, 1047-1108

Cochrane, John H., 2007, Financial Markets and the Real Economy in Rajnish Mehra, Ed. Handbook of the Equity Premium Elsevier 2007, 237-325. 

I'll assign bits and pieces, but feel free to read them all once to keep the themes in view. You will find that some of these readings overlap. Seeing the same point in different ways should make it easier in the end.

Communication:  Everything will be posted on the class website.  Make sure you sign up for the email list so you get news about typos etc.. I’m in  HC 459, 702-3059,

III. Schedule and reading list:

Do the indicated required readings before class. 

Week 0 Review Do this and complete the week zero of coursera before class on Sept 30.



Week 1. Basic model, Overview, Classic issues in Finance

Class 1: Introduction and overview of facts and a bit of theory. (Equity premium, value effect, Fama-French model, predictability, business cycle facts)

Optional/extra materials

Class 2: Basic consumption-based model, Classic issues in finance -- means and variances, expected returns and betas, discounts due to risk, and so on.

Week 2

Class 3: Classic issues continued

Class 4: General equilibrium; contingent claims and risk-neutral probabilities

Week 3.

Class 5: State-space representation, risk sharing, aggregation

Class 6: Existence of a discount factor; existence of a positive discount factor 

Week 4.

Class 7: Mean-variance frontier

Class 8: Beta representations; relationhip between discount factor, mean-variance and beta representations; conditioning information

Week 5

Class 9: Factor pricing models.; CAPM, ICAPM, APT

Class 10: Factor structure and factor pricing in action. The value premium, the Fama-French model and beyond

Week 6.

Class 11 Option pricing.

Class 12 Term structure definitions, the expectations hypothesis its violation, and factor structure in bonds. 

Week 7.

Class 13, 14 Term structure models. Vasicek, CIR and all that

Week 8.

Class 15, 16 Portfolio theory

Week 9-10. Asset pricing and macro.

Class 17: Predictability and volatility

Class 18: Equity premium and consumption-based models

Class 19: Utility functions

Class 20: Production, general equilibrium, and other approaches


III. Problem sets

Note that answer links will not work until after the problem set due date. The problem set links below the line may work, but they are from previous years. They are not official until I rework them and post them above the line for this year.

Problem set 1 Due monday Oct 21

Problem set 1 answers 10/23

Problem set 2 Due Wed Oct 30

Problem set 2 answers 10/30

Problem set 3 Due Monday Nov 11

Problem set 3 answers

Problem set 4 Due Wed Dec 4-

Problem set 4 answers

Final Exam Answers 2013 1/13/2014


----- Links below this line are not yet updated ---

Problem set 5

Problem set 5 answers

Problem set 6

Problem set 6 answers

Problem set 7 The Data file

GMM lecture notes

Problem set 7 answers matlab program function doit function min2

Problem set 8 factors data returns data

Regression model summary

Problem set 8 answers
matlab program
function tsregress_gmm
function olsgmm_ps6
function cs_gmm

Problem set 9

Problem set 9 answers
matlab program

Sample final exam Warning! This is the final from the last time I taught the course. I have not reviewed the questions or answers for accuracy, and consistency with how I taught the course this year. This is mostly to help you see the style of final exams.

Final exam answers

Final exam score distribution: