This course is an introduction to asset pricing theory in continuous time. The first part of the course focuses on the methods and tools which are essential to understand and work with continuous-time asset pricing models. Students will learn about the most important concepts of stochastic calculus including, inter alia, Itô’s calculus, martingales, measures and stochastic optimal control. The second part of the course will give an overview of important asset pricing models including, e.g., the Lucas economy, models with incomplete information, and intermediary asset pricing.
Students will be provided with lecture notes which are based on selected chapters of the following text books and selected papers. The specific chapters and papers are referenced in the lecture notes.
• Kerry E. Back (2017). Asset Pricing and Portfolio Choice Theory. Oxford University Press, New York, 2nd edition
• Tomas Björk (2004). Arbitrage Theory in Continuous Time. Oxford University Press, Oxford, 2nd edition
• Darrell Duffie (2010). Dynamic Asset Pricing Theory. Princeton University Press, 3rd edition
• Ioannis Karatzas and Steven Shreve (2017). Methods of Mathematical Finance. Springer, New York
• Steven Shreve (2010). Stochastic Calculus for Finance II: Continuous-Time Models. Springer, New York
• Bernt Øksendal (2013). Stochastic Differential Equations: An Introduction with Applications. Springer, Berlin Heidelberg