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• April 26 (Meeting 12)
  • We will discuss risk-sharing. Take a look at the Lucas and Stokey paper to see how to attack this issue when preferences are recursive. This is a hard (at least for me) topic but we will see how much progress we can make
  • Also on our list will be Case-Based Decision Theory. We will center our discussion around the Guerdjikova portfolio paper (mostly this will be next week).
  • Before we touch on case-based decision theory, let's spend a few minutes on Knightian Uncertainty (or Ambiguity). This is will lay the framework for cas-based stuff. Read the Gilboa and Schmeidler paper if you get a chance.
• April 24 (Meeting 11)
  • We will take a look at the Barberis, Huang, and Santos model. This model delivers many of the same features as the Habit model. Here, however, the behavior is justified in terms of Prospect Theory (Kahneman and Tversky 1979)
  • Finished BHS paper and started discussion of risk-sharing
• April 19 (Meeting 10)
  • We will also take a look at the Barberis, Huang, and Santos model. This model delivers many of the same features as the Habit model. Here, however, the behavior is justified in terms of Prospect Theory (Kahneman and Tversky 1979)
  • Finished Campbell-Cochrane and started in on BHS model
• April 17 (Meeting 9)
  • Assignments
    • Assignment 2 is posted - April 24 deadline. See [Assignments]
    • Fixed a typo in question 1
  • We will finish the Routledge Zin GDA paper (the calibration results)
  • Next we discuss the Campbell-Cochrane (1999) "Habit" model. This is now quite a standard approach to generating the necessary time variation in the equity premium.
  • The paper builds on Backus and Zin (1994) who look at the pricing kernel in the bond market
  • Finished the GDA paper. Started in on Campbell/Cochrane
• March 12 (Meeting 8)
  • Last day, we saw that the equity premium puzzle requires a "dynamic" solution where the risk aversion is effectively state dependent. We will talk about the Routledge Zin GDA paper (and a touch on a few other first-order-risk-avers
  • Discussed the time-variation in pricing kernel and how the Routledge-Zin GDA preferences work
• March 10 (Meeting 7)
  • We talked about the calibration of the KP model to the data. We spend most of our time on a iid economy. At the end, we looked at the Melino-Yang calculation of the pricing kernel implied by the Mehra-Prescott data.
• March 5 (Meeting 6)
  • We will continue our discussion of Epstein-Zin and work out the pricing kernel. Once we have the pricing kernel we can see what it implies for the equity premium
  • Take a look at the Melino-Yang paper (particularly the pricing kernel calculations)
  • We built the pricing kernel in the KP model
• April 3 (Meeting 5)
  • We will look at applications of recursive utility. In particular, we will look at the representative-agent asset pricing model
  • Look at Epstein-Zin (1989) Sections 5 and 6.
  • Assignments
    • Assignment 1 is posted - April 10 deadline. See [Assignments]
  • Here is the xfig and latex code to draw a tree
    • Gzip file
• We looked at the consumption/savings/portfolio problem in Epstein-Zin and constructed. So far we have derived the Euler equation of mu(z)=1.

• March 29 (Meeting 4)
  • The topic for today is time and risk. The plan is to discuss what properties we might want in preferences that involve intertemporal choice (e.g., time consistency) and what sort of preferences deliver them.
  • My suggestion for what you might want to read
    • Adding time/risk is a lot of notation. Try not to get lost and focus on the concepts. We will do a few examples to see non-time consistent and time-consistent preferences.
    • Johnsen and Donaldson (1985) -- what are the definitions / issues
    • Kreps Porteus (1979) -- Read introduction and Section 3
    • [If you get a chance, Epstein Zin 1989 -- Focus on Section 3]
    • [Koopmans -- The basic stuff on recursive utility under certain consumption plans. No need to read this now]
  • We focused on two examples. The examples highlight we might like to specify a preference for the resolution of uncertainty. That is, aggregation across states need not be the same as aggregation across states. We also want a model that can incorporate non-expected utility like Chew-Dekel. Lastly, the example highlighted that we need to impose other conditions on dynamic preferences so that choice across dates makes sense (e.g., time-consistent planning).

• March 27 (Meeting 3)
  • To get a feel for how these decision models work in a finance setting, we can apply them to a simple portfolio problem (static setting with, say, two assets)
  • Check out the "risk" section in Backus-Rotuledge-Zin for examples.
  • The next topic we aim for is to put these models into a dynamic setting. No need to read anything for Monday. But for Wednesday of next week, we will look at Jonsen and Donaldson, Kreps Porteus (see section 3) and a bit of Epstein-Zin (Also section 3).
  • We looked at examples in the Chew-Dekel class and how they applied to a simple portfolio problem

• March 22 (Meeting 2)
  • Finish EU
  • We will talk about Chew and "Betweenness" copy on my door
  • Dekel (1986) (see link on reading list) is easier to read, but geometry in Chew is more fun
  • Also check out Backus, Routledge, Zin pages 8-15 for some advice on how to apply things.
  • If you just have time for one thing, read Chew
  • After wrapping up EU, we talked about the Chew replacement for the independence axiom. Chew uses a "substitution" axiom that defines the betweenness class (linear in probabilities) and a range of possibilities up to Expected Utility

• March 20 (Meeting 1)
  • First Meeting in room 318 - 8.30am
  • The plan is to talk about an overview of the course and then dive in to (a quick review) of the v.n.m axioms for expected utility
  • We covered the intro and axioms. The final step to prove Expected Utility representation is next day

• NOTE:
  • As of 3.15.2006, Syllabus is under construction. The first part is locked-down. I plan to tweak the later part a bit. If you have suggestions, let me know

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