Finance 923 Financial Economics under Imperfect Information Spring 2008

Transcription

1 Finance 923 Financial Economics under Imperfect Information Spring 2008 Instructor: Prof. Stavros Panageas, SHDH 2326, 3620 Locust Walk, Philadelphia PA, Time and Location: Wednesdays 3-6 p.m.. Location: TBA Course Description: Many interesting economic problems involve two aspects. First, agents operate under uncertainty either about future states of nature or about other agents actions. Second, the passage of time changes their information set. In the last 20 years there has been substantial progress in terms of developing models to understand economic situations that involve dynamic interactions between agents in the presence of uncertainty. Compared to static environments, dynamic environments allow us to model various phenomena that are commonly observed in reality such as reputational concerns, renegotiations, history-dependent bonus-malus incentive schemes, relations built through trust etc.. This course develops the tools that are required to analyze such concepts. Even though there will be abundant applications to real-world incentive and strategic problems, the course will be theoretical. If time permits, we will also discuss a recent literature on the empirical estimation of strategic interactions. The course is intended for second-year PhD students. Course Prerequisites: Even though I have made every effort to keep the course selfcontained, students will find it easier to follow the course if they have previously taken an introductory PhD level course in dynamic programming and game/contract theory. Course Requirements and Grading: There will be five assignments, that students will have to hand in. Students may work in teams to solve the assignments, but they have to hand in their own solutions. There will also be a final exam, that will make up most of the grade. Grading will be based on the following formula: Assignments 30% Final 70% 1

2 Textbook: There is no single textbook for this course. We will however use sections from the following textbooks: 1. Mas-Colell, A., M. D. Whinston, and J. R. Green (1995): Microeconomic Theory. Oxford University Press. 2. Ljungqvist, L., and T. J. Sargent (2004): Recursive macroeconomic theory. MIT Press, Cambridge and London. List of Topics: The following list is an indicative set of topics that we will cover. The references marked with ( ) are required reading. 1. Dynamic Programming in Discrete time. The Bellman Equation and the principle of optimality. Ito s Lemma. Dynamic Programming in continuous time. Applications. ( )Sundaram, R. K. (1996): A first course in optimization theory. Cambridge University Press, Cambridge; New York and Melbourne. Chapters 11,12 Øksendal, B. (2003): Stochastic differential equations. Springer-Verlag. Chapter The static Principal Agent Problem. Linear contracts and multi-task principal agent problems. Applications. ( )Mas-Colell, A., M. D. Whinston, and J. R. Green (1995): Microeconomic Theory. Oxford University Press. Chapter 14 Holmstrom, B., and P. Milgrom (1994): The Firm as an Incentive System, American Economic Review, 84(4), ( )Holmstrom, B., and P. Milgrom (1991): Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design, Journal of Law, Economics, and Organization, 7,

3 3. The dynamic Principal Agent Problem. History dependence. The inverse Euler Equation. The special case of constant absolute risk aversion and linear contracts. The promised value approach. ( )Chiappori, P.-A., I. Macho, P. Rey, and B. Salanie (1994): Repeated Moral Hazard: The role of memory, commitment, and the access to credit markets, European Economic review, 38, ( )Rogerson, W. P. (1985): Repeated Moral Hazard, Econometrica, 53(1), Holmstrom, B., and P. Milgrom (1987): Aggregation and Linearity in the Provision of Intertemporal Incentives, Econometrica, 55(2), ( )Spear, S. E., and S. Srivastava (1987): On Repeated Moral Hazard with Discounting, Review of Economic Studies, 54(4), Phelan, C., and R. M. Townsend (1991): Computing Multi-period, Information- Constrained Optima, Review of Economic Studies, 58(5), Foundations of Incomplete Markets. Hidden Savings. ( )Ljungqvist, L., and T. J. Sargent (2004): Recursive macroeconomic theory. MIT Press, Cambridge and London. Chapter 14 Kocherlakota, N. R. (1996): Implications of Efficient Risk Sharing without Commitment, Review of Economic Studies, 63(4), Cole, H. L., and N. R. Kocherlakota (2001): Efficient Allocations with Hidden Income and Hidden Storage, Review of Economic Studies, 68(3), Dynamic Lagrange Multipliers and the promised value approach ( )Marcet, A., and R. Marimon (2000): Recursive Contracts, Department of Economics and Business, Universitat Pompeu Fabra, Economics Working Papers. 3

4 He, H., and H. F. Pages (1993): Labor Income, Borrowing Constraints, and Equilibrium Asset Prices, Economic Theory, 3(4), Panageas, S. (2007): Optimal Retirement Benefit Guarantees, The Wharton School of the University of Pennsylvania, Rodney White Working paper. 6. Limited Commitment and applications to optimal lending contracts ( )Albuquerque, R., and H. A. Hopenhayn (2004): Optimal Lending Contracts and Firm Dynamics, Review of Economic Studies, 71(2), ( )DeMarzo, P. M., and M. J. Fishman (2007): Agency and Optimal Investment Dynamics, Review of Financial Studies, 20(1), DeMarzo, P. M., and Y. Sannikov (2006): Optimal Security Design and Dynamic Capital Structure in a Continuous-Time Agency Model, Journal of Finance, 61(6), Repeated Games and Reputation ( )Ljungqvist, L., and T. J. Sargent (2004): Recursive macroeconomic theory. MIT Press, Cambridge and London. Chapter 15 Abreu, D., D. Pearce, and E. Stacchetti (1990): Toward a Theory of Discounted Repeated Games with Imperfect Monitoring, Econometrica, 58(5), Global Games ( )Morris, S., and H. S. Shin (1998): Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks, American Economic Review, 88(3), ( )Morris, S., and H. S. Shin (2001): Global Games: Theory and Applications, Mimeo. Princeton and LSE 9. Information aggregation models and Market Microstructure 4

5 ( )Grossman, S. J., and J. E. Stiglitz (1980): On the Impossibility of Informationally Efficient Markets, American Economic Review, 70(3), ( )Kyle, A. S. (1985): Continuous Auctions and Insider Trading, Econometrica, 53(6), Angeletos, G.-M., and I. Werning (2006): Crises and Prices: Information Aggregation, Multiplicity, and Volatility, American Economic Review, 96(5),