Credits
5 ECTS
Teaching method
Classroom instruction + student presentations.
2x2 lectures per week for 7 weeks.
Language
English
Examination
Individual take-home assignment, all aids allowed.
Assessment
Pass/No pass, no co-examiner (re-exam oral)
Lecturers
Juan Carlos Parra-Alvarez
Mads Markvart Kjær
Course description
This course introduces the theoretical and empirical foundations necessary to develop a critical understanding of the literature in asset pricing and macro-finance. Emphasis is given to models of intertemporal choice under uncertainty, consumption-based asset pricing, asset pricing in general equilibrium in addition to classical theories of return predictability and factor models. The course also familiarizes the student with some advanced empirical methods commonly used to test various theories.
The course is intended for doctoral students in finance, economics and related fields.
Upon completion of this course, students should acquire a clear understanding of the major theoretical results concerning discount factors, individuals' consumption decisions under uncertainty, their implications for asset prices, and testing these.
The course aims to provide the students with the tools necessary to develop their research skills and begin constructing their own hypotheses and research ideas in financial economics that could lead to an academic paper.
Academic prerequisites
Students should have a basic understanding of probability theory, asset pricing,
macroeconomics, econometrics.
For PhD students at AU (ECON), this course has been pre-approved as an internal BSS PhD course equivalent to 5 ECTS.
Contents
The course covers the following core topics:
If time permits, additional material may be incorporated to reflect recent developments in the literature.
Description of qualifications
Knowledge and understanding of:
The theoretical foundations of asset pricing, including stochastic discount factors, state pricing, and the absence of arbitrage.
Intertemporal models of consumption under uncertainty and their implications for equilibrium asset prices.
Classical and modern theories of return predictability and factor structures in financial markets.
The connection between asset pricing theory, empirical evidence, and macroeconomic fundamentals.
The main challenges and puzzles in explaining asset returns, as well as leading proposed resolutions (habits, long-run risks, rare disasters, ambiguity, etc.).
Skills to:
Derive and interpret asset pricing relations from first principles using general equilibrium and stochastic discount factor approaches.
Formulate and analyze dynamic models linking consumption, risk, and asset returns.
Implement and critically assess empirical methods used in testing asset pricing models, including GMM and SMM estimation techniques.
Apply statistical and econometric tools to evaluate model fit, conduct model selection, and identify model misspecification.
Synthesize and evaluate empirical findings in the literature and relate them to theoretical predictions.
Competences in:
Integrating theoretical, quantitative, and empirical perspectives in the analysis of financial markets.
Critically assessing the assumptions and implications of asset pricing models and their empirical performance.
Developing original research ideas in financial economics, from conceptual formulation to empirical implementation.
Engaging with the frontier of asset pricing and macro-finance research and contributing to scholarly debates in the field.
Examination
The course is evaluated through an individual take-home research paper. The assignment requires the student to develop and analyze an original research idea that applies the theoretical and empirical tools covered in the course. The project should be conceptually related to the student’s PhD dissertation or future research interests and must demonstrate independent thinking and methodological rigor. Scheduled individual supervision meetings may be arranged during the course period to provide feedback and guidance. The paper should clearly articulate the relevance of the topic and methodology, state hypotheses and data sources (if applicable), discuss and interpret model assumptions and mechanisms, situate the contribution within the existing literature, and present the analysis in a precise and scholarly manner.
Deadline to submit the paper is 6 weeks after the last lecture.
The paper can be written individually or in groups of max. 2 students. Length of the paper is max. 15 pages if one student and max. 25 pages if 2 students.
Prerequisites for examination participation
To participate in the final examination, each student must give one in-class oral presentation (approximately 20 minutes) of a research paper related to the course topics. The purpose of the presentation is to develop the student’s ability to critically assess research contributions and to communicate complex theoretical and empirical arguments clearly. Students will receive feedback from the instructors and peers. For the presentation, the student is expected to:
Identify the main contribution of the paper and argue for the relevance of the results and methodology used.
Clearly state the hypotheses, methods, and data sources (if applicable).
Describe and discuss the relevance of any key model assumptions.
Explain the main mechanisms of the model and how they generate the results.
Situate the paper within the broader literature, highlight its contribution, and suggest potential avenues for further research.
Provide a critical assessment of the paper’s limitations and propose possible improvements or extensions.
Literature
The lectures are based on selected chapters of textbooks and research papers. Potential textbooks and research articles include (but are not limited to):
Textbooks:
Articles:
Breeden, Douglas T., Robert H. Litzenberger, and Tingyan Jia (2015). “Consumption-based Asset Pricing, Part 1: Classic Theory and Tests, Measurement Issues, and Limited Participation”. Annual Review of Financial Economics (7), pp. 35–83.
Breeden, Douglas T., Robert H. Litzenberger, and Tingyan Jia (2015). “Consumption-Based Asset Pricing, Part 2: Habit Formation, Conditional Risks, Long-Run Risks, and Rare Disasters”. Annual Review of Financial Economics (7), pp. 85–131.
Campbell, J. Y. (1991). “A Variance Decomposition for Stock Returns”. The Economic Journal, 101(405), pp. 157-179.
Campbell, J. Y., & Vuolteenaho, T. (2004). “Bad Beta, Good Beta”. American Economic Review, 94(5), pp. 1249-1275.
Cochrane, John (2008). “Financial Markets and the Real Economy”, In: Handbook of the Equity Risk Premia, Chapter 7, pp. 237-325
Cochrane, John (2011). “Presidential Address: Discount Rates”. Journal of Finance, 66(4), pp. 1047-1108
Constantinides, George M., and Anisha Ghosh (2011). “Asset Pricing Tests with Long-run Risk in Consumption Growth”, Review of Asset Pricing Studies, 1, pp. 93-136
Feng, G., Giglio, S., & Xiu, D. (2020). “Taming the Factor Zoo: A Test of New Factors”. The Journal of Finance, 75(3), pp. 1327-1370.
Froot, K. A., & Ramadorai, T. (2005). “Currency Returns, Intrinsic Value, and Institutional‐investor Flows”. The Journal of Finance, 60(3), pp. 1535-1566.
Giglio, S., Kelly, B., & Xiu, D. (2022). “Factor Models, Machine Learning, and Asset Pricing”. Annual Review of Financial Economics, 14(1), pp. 337-368.
Jagannathan, R., Schaumburg, E., & Zhou, G. (2010). “Cross-sectional Asset Pricing Tests”. Annu. Rev. Financ. Econ., 2(1), pp. 49-74.
Koijen, R. S., & Van Nieuwerburgh, S. (2011). “Predictability of Returns and Cash Flows”. Annu. Rev. Financ. Econ., 3(1), pp. 467-491
Lucas, Robert Jr. (1978). “Asset Prices in an Exchange Economy”, Econometrica, 46, pp. 1429–1445.
McLean, R. D., & Pontiff, J. (2016). “Does Academic Research Destroy Stock Return Predictability?”. The Journal of Finance, 71(1), pp. 5-32.
Parra-Alvarez, Juan Carlos, Olaf Posch, and Andreas Schrimpf (2022). “Peso Problems in the Estimation of the C-CAPM”. Quantitative Economics, 13(1), pp. 259-313.
Robotti, Cesare, and Nikolay Gospodinov (2013). “Asset Pricing Theories, Models, and Tests” In: Portfolio Theory and Management, Chapter 3, pp. 46-72
Tsai, Jerry, and Jessica A. Wachter (2015). “Disaster Risk and its Implications for Asset Pricing”, Annual Review of Financial Economics, 7, pp. 219-52
Vuolteenaho, T. (2002). “What Drives Firm‐level Stock Returns?”. The Journal of Finance, 57(1), pp. 233-264.
Registration
Registration for PhD course: Financial Economics
Schedule
Wednesday 08-04-2026 at 10:00-12:00 in 1814-255
Friday 10-04-2026 at 10:00-12:00 in1814-255
Wednesday 15-04-2026 at 10:00-12:00 in 1814-255
Friday 17-04-2026 at 10:00-12:00 in 1814-255
Wednesday 22-04-2026 at 10:00-12:00 in 1814-255
Friday 24-04-2026 at 10:00-12:00 in 1814-255
Wednesday 29-04-2026 at 10:00-12:00 in 1814-255
Friday 01-05-2026 at 10:00-12:00 in 1814-255
Wednesday 06-05-2026 at 10:00-12:00 in 1814-255
Friday 08-05-2026 at 10:00-12:00 in 1814-255
Wednesday 13-05-2026 at 10:00-12:00 in 1814-255
Friday 15-05-2026 at 10:00-12:00 in 1814-255
Wednesday 20-05-2026 at 10:00-12:00 in 1814-255
Friday 22-05-2026 at 10:00-12:00 in 1814-255
Contact
Susanne Christensen, sch@econ.au.dk