Asset Pricing

[HTC]

Is there anybody in here have already taken Asset Pricing as one of their field courses? What other fields in economics is Asset Pricing most closely related too? I am first year phd student and thinking about what courses to take next year. From online lecture notes, I have the feeling that it looks like macro. Any advice?

[sonicskat]

Any time that we have done asset pricing, it has been in macro. I haven't heard a word about the field in micro. Obviously there are ties to financial

[puecon]

General equilibrium models with features like incomplete markets, overlapping generations, infinitely lived agents, etc have very important implications for macroeconomics and finance. In fact, the only asset pricing models I have heard of are essentially "macro asset pricing" models in the sense that they study the allocation and pricing of various assets in the context of general equilibrium (such as CAPM). However, not every macroeconomics course is focusing various kinds of recursive general equilibrium models, and not every macro course that focuses on recursive general equilibrium models necessarily focuses on subjects that are crucial in finance. I think you should talk to your professors to see which subjects will be covered. You could also consider taking courses in mathematical finance if the math or statistics departments at your school offer those. Those courses focus more on the mathematical aspects of derivatives pricing (stochastic calculus, numeric methods, interest rate models, etc). This is not exactly asset pricing like its taught in finance departments, but it's still probably a useful toolkit to have.

(PS: no haven't taken the field course yet).

[brotherbear]

I have taken courses in 'asset pricing,' though that's not what it's called at the LSE. Here, it's called 'financial economics,' and it's largely applied micro, not macro. It may use some tools of macro, but really, these 'macro' tools are derived from those used in applied micro.

To be fair, the CAPM is incredibly basic (as in we learned it in the first lecture). If you were to tell someone that you knew 'asset pricing,' they should reasonably assume that you can price a derivative. You should know all the tools of financial mathematics. You should know about Weiner processes, Brownian motions, Ito's calculus, multivariate calculus, the Feynman-Kac Representation Theorem, Reimann integration, Reimann-Stieltjes integration, Stratonovich integration, Lebesgue integration, the Radon-Nikodym derivative, the Martingale Representation Theorem, the Fundamental Theorem of Asset Pricing, Ito isometry, some typical methods for solving ODEs and PDEs, the Meta Theorem, equivalent martingale measures, and all properties of the normal distribution.

Beyond just having the tools to price derivatives, you should be able to explain the underlying assumptions used in your pricing. You should be able to understand if asset returns truly follow a random walk and if investors truly trade off between risk and return. What does it mean to have risk-neutral preferences as an individual? What does that mean when aggregated to the level of the market?

Don't be fooled--asset pricing is easily one of the most complex fields of finance/economics (as evidenced by the fact that a good quant/structurer at an I-bank can be paid upwards of $1 MM).

I hope this helps.