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Arbitrage Pricing

Description

Prerequisites

Statistics, Financial Econometrics

Objectives

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.

Exam Style

There will be a final exam, which accounts for 100% of the final grade.

Requested Material

All material will be provided.

Readings/Textbooks

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

People

 

Schneider P.

Course director

Fiala T.

Assistant

Additional information

Semester
Spring
Academic year
2019-2020
ECTS
6
Language
English
Education
Master of Science in Economics in Finance, Core course, Minor in Digital Finance, 1st year

Master of Science in Economics in Finance, Core course, Minor in Quantitative Finance, 1st year