SIMON FRASER UNIVERSITY
DEPARTMENT OF ECONOMICS
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COURSE: |
Economics 811-4 |
SEMESTER: |
Summer 2005 |
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TITLE: |
Advanced Monetary Theory |
INSTRUCTOR: |
Robert Jones |
Description:
This course is intended to introduce students to continuous time asset pricing models (‘option pricing’ theory) and the tools needed to apply them empirically. The emphasis will be on applications to banking and management of interest rate and credit risk. However, time will also be devoted to the management of natural resources under uncertainty, foreign exchange risk management and the evaluation of real investment decisions (‘real options’).
Application of the contingent claims approach requires bits and pieces from a variety of areas: general equilibrium theory, numerical analysis, econometrics, and financial institutions. Minimal prerequisites would be macroeconomics (ECON 807), microeconomics (ECON 802), introductory econometrics and mathematical methods (ECON 798). Any further work you have done in any of these areas, finance, money and banking, or computer science will make your life easier.
The intent is that by the end of the course you will be able to apply this approach yourself. Consequently, there will be some emphasis on computer implementation (i.e., programming). Students will be expected to do a project as part of the course. FORTRAN subroutines will be provided that will handle some of the nastier programming problems (e.g., implement algorithms for solving partial differential equations) to help you out.
There is no textbook for the course. Readings will consist of articles, working papers and book chapters. You will be expected to make a class presentation on an aspect or application of your choosing. The course grade will be based on homework (20%), final exam (40%), project (20%) and class presentation (20%).
1. Asset pricing: continuous time stochastic processes, arbitrage pricing models, general equilibrium pricing models, term structure of interest rates (Black-Scholes, Heath-Jarrow-Morton, Cox-Ingersoll-Ross, etc.), default processes
2. Numerical Methods: numerical solution of differential equations (Crank-Nicolson, explicit methods, alternating direction implicit, Monte Carlo and low discrepancy methods), interpolation, Newton’s method, Marquardt’s algorithm
3. Econometric issues: estimation of continuous time stochastic processes, latent variable problems, extracting the market’s forecast of future state variables and asset prices, extreme value theory
4. Financial institutions: conventions in debt markets, operation of futures and options markets, over the counter markets (swaps, repurchase agreements), default risk and incentives in contract design, credit rationing, credit derivatives
5. Applications: asset-liability management, dynamic hedging, risk assessment and aggregation, loan commitments, interest rate caps and floors, prepayment options, swap contracts, natural resource management (mining and tree harvesting), regulatory issues (capital requirements, Value at risk), foreign exchange risk, securitization, hedging inflation risk, real options (Pindyck and Dixit)
Students requiring accommodations as a result of a disability must contact the Centre for Students with Disabilities (604-291-3112, or csdo@sfu.ca).
All students are expected to read and understand SFU’s policies with regard to academic dishonesty (T 10.02 and T 10.03). These policies are available at the following web addresses:
http://www.sfu.ca/policies/teaching/t10-02.htm; and, http://www.sfu.ca/policies/teaching/t10-03.htm