डॉ. बी. आर. अम्बेडकर विश्वविद्यालय दिल्ली 
| Course Type | Course Code | No. Of Credits |
|---|---|---|
| Discipline Core | SLS2EC238 |
Course Description:
The course focuses on the role of financial markets and asset prices in allocation of savings in the macroeconomy. Topics covered include contingent claims economy, asset pricing, allocation of savings, etc. in both complete and incomplete markets settings. Prerequisite is Macroeconomics I & II.
Course Outcomes
At the end of the course students should be able to:
1. Explain the role of financial markets in determination of macroeconomic outcomes.
2. Describe a standard model of finance economy.
3. Solve an asset pricing problem under complete markets as well as incomplete markets.
4. Describe the nature and consequences of crisis in asset markets and possible regulatory responses.
5. Describe the financial instability hypothesis proposed by Minsky.
6. Read and comprehend a professionally published research paper in the area of financial economics.
Readings:
The readings for the course will be a combination of textbooks and articles. The main text books followed are as follows:
1. Lengwiler, Yvan (2004), Microfoundations for Financial Economics: An Introduction to General Equilibrium Asset Pricing, Princeton University Press. (LMFE)1
2. Altug, S & Labadie P (2008), Asset Pricing in Dynamic Economies, Cambridge University Press (AL).
3. Magill, Michael & Martine Quinzii (2002), Theory of Incomplete Markets, Volume 1, The MIT Press. (MMIM)
4. Ljungqvist, Lars & Sargent, Thomas J., (2012), "Recursive Macroeconomic Theory, Third Edition," MIT Press Books. (LS)
5. Bodie, Kane, & Marcus (2024), Investments, McGrawhill (BKM).
Suggested follow-up/complementary readings:
1. Back, Kerry E (2017), Asset Pricing and Portfolio Choice Theory, Second Ed. Oxford University Press.
2. Cochrane John H, John (2005), Asset Pricing, Princeton University Press.
3. Campbell John Y (2018), Financial Decisions and Markets, Princeton University Press.
Topics:
1. Role of Financial Markets and Institutions in the economy. This unit introduces students to financial markets and institutions as mechanisms bringing savers and investors with different risk and return profiles together. Efficient functioning of these mechanisms has important implications for capital accumulation. Shocks to these mechanisms will have real effects. History of financial crises will be touched upon. Readings:
(a) Bradfield James, Introduction to the Economics of Financial Markets, Oxford University Press, 2007. Chapters 2,3.
(b) Garber, Peter, Famous First Bubbles, The Fundamentals of Early Manias, The MIT Press, 2001.
(c) BKM, Chapter 2: Asset Classes and Financial Instruments.
2. General Equilibrium Theory of Asset pricing. This unit introduces students to the concepts like, a commodity space, contingent commodities and claims, insurance, complete and incomplete markets, etc., which form the basic building blocks of a ‘finance economy’. The material provides the foundation to analysis of asset prices in the remaining sections. Readings:
(a) LMFE, Chapters 2-5. (b) AL, Chapters 1-3.
(c) Arrow, Kenneth J. and Gerard Debreu, "Existence of an Equilibrium for a Competitive Economy," Econometrica, 1954, 22, 265-290. [JSTOR]2
(d) Debreu, Gerard, Theory of Value - An Axiomatic Analysis of Economic Equilibrium, Cowles Foundation Monograph No. 17, Yale University Press, 1959.
(e) Negishi, Takashi, "Welfare Economics and Existence of an Equilibrium for a Competitive Economy," Metroeconomica, 1960, 12, 92-97.
(f) Townsend, Robert M. “Risk and Insurance in Village India.” Econometrica, vol. 62, no. 3, 1994, pp. 539–591.
3. Factor Models- CAPM and APT: This unit introduces the Capital Asset Pricing Model and the Arbitrage Asset Pricing Model-two workhorse models of empirical finance
literature. Readings:
(a) BKM, Chapters 9,10 (b) Back, Chapters 5,6
4. Dynamic Asset Pricing Theories under complete markets. This unit introduces students to the theory of asset pricing. The material builds on the earlier sections to explore asset pricing using simple finance economy models. Asset pricing under varies
basic conditions and availability of close substitutes and government budget constraint will be introduced. Readings:
(a) AL, Chapters 7,8. (b) LS, Chapters 13, 14. (c) LMFE, Chapters 6-8
(d) Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November
(e) Tim A. Kroencke, 2017. "Asset Pricing without Garbage," Journal of Finance, American Finance Association, vol. 72(1), pages 47-98, February.
(f) Narayana R. Kocherlakota, 1996. "The Equity Premium: It’s Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
(g) Cochrane John H. (2011), “Presidential Address: Discount Rates”. The Journal of Finance, 66: 1047-1108.3
5. Implications of incomplete markets for asset pricing and firm financing. This unit introduces the economics of financial decision making under incomplete markets. Implications of market incompleteness for asset pricing and firms financing is explored. Readings:
(a) MMIM, Chapter 6. (b) LS, Chapter 18.
(c) Bejan, Camelia, 2018. "Production and financial decisions under uncertainty”
(d) Miao, Jianjun & Wang, Neng, 2007. "Investment, consumption, and hedging under incomplete markets," Journal of Financial Economics, Elsevier, vol. 86(3), pages 608-642, December.
(e) J.F. Gomes, A. Yaron, and L. Zhang (2006): ‘Asset Pricing Implications of Firms’ Financing Constraints,’ Review of Financial Studies.
(f) F. Kubler and K. Schmedders (2003): ‘Stationary Equilibria in Asset-Pricing Models with Incomplete Markets and Collateral,’ Econometrica , 71(6), 1767- 1793.
(g) J. Heaton and D. Lucas (1996): ‘Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing,’ Journal of Political Economy 104(3), pp. 443-87.
(h) D. Levine and W. Zame (2001): ‘Does Market Incompleteness Matter,’ Econometrica , 70, 1805-1840.
6. Macrofinance: financial markets and macroeconomic outcomes. This unit introduces students to relatively newer field of macro-finance. The material focusses on interaction of financial markets with goods and labor markets to determine short term and long term output in the economy. Focus is on transmission of shocks to financial markets to the goods and labor markets. Readings:
(a) Cochrane, 2017. "Macro-Finance," Review of Finance, European Finance Association, vol. 21(3), pages 945-985
(b) Brunnermeier, Markus K., and Yuliy Sannikov. 2014. "A Macroeconomic Model with a Financial Sector." American Economic Review, 104(2): 379-421.
(c) Rudebusch Glenn R, 2010."Macro-Finance Models Of Interest Rates And The Economy," Manchester School, University of Manchester, vol. 78(s1), pages 25- 52, September.
(d) T. Cooley, R. Marimon, and V. Quadrini (2004): ‘Aggregate Consequences of Limited Contract Enforcement,’ Journal of Political Economy , 112, 817-847
(e) V. Quadrini and U. Jermann (2006): ‘Financial Innovation and Macroeconomic Volatility,’ Wharton, mimeo.
Grading Scheme:
Your final grade will be determined as follows:
End Semester Exam 40%
Problem Sets 30%
Group Presentations 30%