The course is meant to provide a sound understanding of the mutual interactions between macroeconomic and financial variables.
Learning outcome
Knowledge
You learn
- What are the economic drivers behind long-run growth,
- What are the business cycle determinants.
- What are the asset prices (and returns) implications of growth, cross-country convergence and business cycle dynamics.
- How to model the relationship between macroeconomic variables and financial markets.
Skills
You should be able to
- explain how international stock markets have evolved historically
- assess current macroeconomic risk and assess how such risk affects financial markets
- understand the relationship between different forms of risk and stock market returns
- understand how different risks affect optimal portfolio choice
General competence
You should be able to
- Read and understand research papers on the topics of this course.
- Forecast asset prices and returns over the medium run
- Design portfolio allocation strategies conditional to the portfolio holder’s exposure to macroeconomic (systemic) and individual (idiosyncratic) risks
Course content
Macroeconomics
Stylized facts concerning growth, business cycles and financial markets
Interpretation of macroeconomic facts: i) what determines long-run growth; ii) why is per capita income in some countries higher than in others? Topics include the role of technical change, the savings rate, and knowledge dynamics. The standard distinction between exogenous and endogenous technical change will be discussed at length. ii) Business cycle models, where technology and demand shocks cause economic fluctuations and have persistent effects because the economy is characterised by sluggish adjustment.
Theoretical implications of macroeconomic models for asset pricing; the stochastic discount factor approach.
Finance
Basics: present values, static and dynamic optimisation, risk aversion and utility function.
Capital asset pricing model (CAPM): The old view.
Back to fundamentals in economic analysis: financial markets as an insurance scheme.
- The role of financial markets
- The meaning of Risk sharing
An introduction to the consumption-based model. Consistently with the modelling strategy of consumption/saving decisions in macro models, we apply the approach based on intertemporal optimisation to the problem of pricing single assets.
Empirical evidence I. The consumption-based model and the equity premium and risk-free rate puzzles
How can we explain the consumption-based model's poor empirical performance?
Empirical evidence II. The relation between prices, dividends and returns. Are returns forecastable?
The term structure of interest rates
Behavioural finance: are markets irrational?
Wrap up
Discussion of macro-finance literature.
- Docente: PATRIZIO TIRELLI