Financial Market Risks

Dozent Prof. Dr. Didier Sornette

Vorlesungsverzeichnis /  Course Catalogue

1st Lecture: Monday, September 26, 2011, 10-12, Room HG D 1.1

END-OF-SEMESTER Examination:
Monday 16 January, 2012, 10:15 - 11:45, Room HG F7

Lecture 1:

The Normality of Financial Crises and Dynamical Risk Management

Reading:
- R. Roll, What every CFO should know... (1994)
- J.C. Bogle, The fiduciary principle, JPM (2009)
- D. Sornette and R. Woodard, Financial Bubbles, Real Estate Bubbles, Derivative Bubbles and the Financial and Economic Crisis (2009)

Lecture 2:

Risk premium, market risk, diversification, beta and alpha

Book: Brealey/Myers/Allen, Corporate Finance
e-chapter 7: Introduction to Risk, Return, and the Opportunity Cost of Capital

Exercises of Chapter 7

Reading:
- R. Zeckhauser, Investing in the Unknown and Unknowable
- P. Fernandez, The Equity Premium in 150 Textbooks

Lecture 3:

Portfolio Optimization and Asset Pricing

Book: Brealey/Myers/Allen, Corporate Finance
e-chapter 8: Risk and Return excel file for portfolio optimization

Exercises of Chapter 8

Reading:
- V. DeMiguel, L. Garlappi, R. Uppal, Optimal versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy? Rev. Financial Studies (2009)
- Y. Malevergne and D. Sornette, Multi-Moments Method for Portfolio Management: Generalized Capital Asset Pricing Model in Homogeneous and Heterogeneous Markets
- Y. Malevergne, P. Santa-Clara and D. Sornette, Professor Zipf goes to Wall Street
- J. Montier, Seven Sins of Fund Management (2005)

Lecture 4:

Corporate Financing and the Lessons of Market Efficiency

Book: Brealey/Myers/Allen, Corporate Finance
e-chapter 13: Corporate financing and the six lessons of market efficiency

Exercises of Chapter 13

Reading:
- P.S. Russel and V.M. Torbey, The Efficient Market Hypothesis on Trial: A Survey
- S.J. Grossman and J.E. Stiglitz, On the impossibility of informationally efficient markets, The American Economic Review 70 (3), 393-408 (1980)
- Mark Rubinstein, Rational Markets: Yes or No? The Affirmative Case (2001)
- A.W. Lo, Efficient Markets Hypothesis and the Adaptive Market Hypothesis

Lecture 5:

Understanding Options

Book: Brealey/Myers/Allen, Corporate Finance
e-chapter 20: Understanding options

Exercises of Chapter 20

Reading:
- C. Bemis, Put-Call parity (2006)

Lecture 6:

Valuing Options

Book: Brealey/Myers/Allen, Corporate Finance
e-chapter 21: Valuing options Black-Scholes in excel

Exercises of Chapter 21

Reading:
- J.C. Cox, S.A. Ross and M. Rubinstein, Option pricing: a simplified approach, Journal of Financial Economics 7, 229-263 (1979)
- J.C. Jackwerth and M. Rubinstein, Recovering probability distributions from option prices, The Journal of Finance 51 (5), 1611-1631 (1996)
- http://en.wikipedia.org/wiki/black-Scholes
- J.-P. Bouchaud, G. Iori and D. Sornette, Real-world options, Risk 9 (3), 61-65, March (1996)

Lecture 7:

Real Options

Book: Brealey/Myers/Allen, Corporate Finance
e-chapter 22: Real Options Valuing a real option in excel

Exercises of Chapter 22

Reading:
- C.R. Harvey, Identifying Real Options, Fuqua School of Business, Duke University, Durham, NC (1999)
- E. Gilbert, Investment Basics XLIX. An Introduction to real options, Investment Analysts Journal - No. 60, 49-52 (2005)
- W. Margrabe, The value of an option to exchange one asset for another, The Journal of Finance 33 (1), 177-186 (1978)
- IBM Institute for Business Value, Calculating value during uncertainty: Getting real with "real options"

http://www.er.ethz.ch/publications/thesis
- Thomas Ukel Mbolo, (Swiss Re) Project Valuation using real options, May 2008
- Dimitris Karamitsos, (ABB) Real Options in Strategy of R&D Portfolio: Comparing model to traditional methods of investments evaluations, Dec 2009

Lecture 8:

Government bonds and Interest rates

Book: Brealey/Myers/Allen, Corporate Finance
e-chapter 3, 24 and 25

Exercises of Chapter 23 - Chapter 24

Reading:
- O. Vasicek, An equilibrium characterization of the term structure, Journal of Financial Economics 5, 177-188 (1977)
- F.A. Longstaff, P. Santa-Clara and E.S. Schwartz, Throwing away a billion dollars: the cost of suboptimal exercise strategies in the swaptions market , Journal of Financial Economics 62, 39-66 (2001)
- P. Santa-Clara and D. Sornette, The Dynamics of the forward Interest Rate Curve with Stochastic String Shocks, The Review of Financial Studies 14 (1), 149-185 (2001)