Statistics, Financial Econometrics
Arbitrage Pricing develops the notion of ‘no-arbitrage’ or ‘no free lunch’ from first principles. After having taken the course, students will be familiar with the general concept of no-arbitrage, and its use in the pricing of uncertain cash flows with common models used in the industry and academia.
Description / Program
The course is structured along the following topics.
- Brief review of probability
- No-arbitrage in the static, finite-dimensional case
- No-arbitrage in a dynamic (in)finite-dimensional setting
- Brownian motion
- Introduction to the stochastic calculus
- Feynman-Kac theorem
- Black-Scholes model
- (Affine) term structure models
Learning Method / Style of Lessons
Our classes will simultaneously develop the theory and its applications. Students will be introduced to the must-know models for a career in modeling and pricing.
There will be a final exam, which accounts for 100% of the final grade.
All material will be provided.
We will be developing all the material autonomously. Relevant textbooks that may help are
Bjork, T. (1998). Arbitrage Theory in Continuous Time. Oxford University Press.
Brigo, D. and Mercurio, F. (2006). Interest Rate Models – Theory and Prac- tice. With Smile, Inflation and Credit. Springer Finance. Springer-Verlag, 2nd edition.
Øksendahl, B. (2000). Stochastic Differential Equations. Springer.
Shreve, S. E. (2004). Stochastic Calculus for Finance II, Continuous-Time Models. Springer, Berlin