Advanced Microeconomics ( Asset Pricing)

obligatory courses

This is an advanced microeconomics course offered to Quantitative Finance students. The aim of the lecture is to introduce to modern microeconomics as required by our curriculum. Emphasis is put on concepts applied in asset pricing. The course is based on Hal Varian: Intermediate Microeconomics: A Modern Approach, W. W. Norton & Co., 2010, and Stephen Blyth: An Introduction to Quantitative Finance, Oxford University Press 2013. Students are also encouraged to read selected chapters of Mas-Colell A., Whinston M. D., Green J., Microeconomic Theory, Oxford University Press 1995. This text, however, may be considered too advanced by many course participants.

This is an advanced microeconomics course offered to Quantitative Finance students. The aim of the lecture is to introduce to modern microeconomics as required by our curriculum. Emphasis is put on concepts applied in asset pricing. The course is based on Hal Varian: Intermediate Microeconomics: A Modern Approach, W. W. Norton & Co., 2010 (IM), and Stephen Blyth: An Introduction to Quantitative Finance, Oxford University Press 2013 (IQF). Students are also encouraged to read selected chapters of Mas-Colell A., Whinston M. D., Green J., Microeconomic Theory, Oxford University Press 1995 (MT). This text, however, may be considered too advanced by many course participants.

Lecture topics (chapters in textbooks are given in parentheses)

01 Microeconomic approach to economic analysis: optimization and equilibrium; discussion of constraints (IM 1,9, IQF 1)

02 Consumer's choice (I): preferences versus utilities; bundles; axioms of consumer behaviour (IM 2-5, MT 1A,B, 2A-D)

03 Consumer's choice (II): budget constraints; indirect utility functions; welfare change measures (IM 6,14, MT 3D,G,I)

04 Intertemporal choice: discounting; IRR; alternative interpretations of discount rates (IM 10, IQF 1, MT 20)

05 Choice under uncertainty: lotteries; von Neumann-Morgenstern expected utility; risk aversion (IM 12-13, IQF 1, MT 6A-C)

06 Partial versus general equilibrium approach: Walrasian equilibrium; Edgeworth box technique for a pure-exchange economy (IM 16, 31,32, MT 15A-E)

07 First and Second Fundamental Welfare Economics Theorems; mathematics and Edgeworth boxes (IM 33, MT 16A-D)

08 Asymmetric information: adverse selection; signalling; screening (IM 37, MT 13A-D, 14A-D)

09 Game theory (I): cooperation and rivalry; Nash equilibrium; pure and mixed strategies (IM 28,29, MT 7A-E)

10 Game theory (II): Subgame Perfect Nash Equilibrium; examples of imperfectly competitive markets; Bertrand and Cournot models (IM 28, MT 9B)

11 Network markets; definition and examples; non-Nash equilibria; price-undercut-proof equilibrium (IM 35)

12 Asset markets: Returns vs. risk; diversification of assets; Markowitz Portfolio Theory; risk-free and many risky assets (IM 11, IQF 2, MT 19E)

13 Black-Scholes model: no-arbitrage principle; risk management strategies; options and derivative instruments (IQF 10,16)

14 Econophysics: heat diffusion equation; economic agents as 'molecules'; random walk; Brownian motion (IQF 9, MT 19B)

15 Kuhn-Tucker Theorem (MT Mathematical Appendix K)

For each lecture there will be a set of exercises to check the correct understanding of concepts just introduced. Exercises are voluntary, but students should solve them in order to be better prepared for the final exam.

Hal Varian: Intermediate Microeconomics: A Modern Approach, W. W. Norton & Co., 2010, and Stephen Blyth: An Introduction to Quantitative Finance, Oxford University Press 2013. Students are also encouraged to read selected chapters of Mas-Colell A., Whinston M. D., Green J., Microeconomic Theory, Oxford University Press 1995.

Students have a deepened knowledge of selected methods and analytical instruments, including socio-economic modeling.

Students have a deepened knowledge of selected institutions and – thanks to emphasizing their continuity – their historical evolution

Students are able to understand and analyze economic phenomena, as well as to evaluate tchem theoretically

Students acquire language skills thanks to taking the course offered in English

KU01, KS03, KS02

For each lecture there will be a set of exercises to check the correct understanding of concepts just introduced. Exercises are voluntary, but students should solve them in order to be better prepared for the final exam.

Final exam (10-15 multiple-choice test questions – 50% + 2-3 open ended exercises – 50%)