Money and Capital Markets
Fall 2011
Instructor: Mark Lautzenheiser
Office: BC 219
Office Hours: 10-11 Thursday, 1:30-2:30 Friday, or by appointment (email me the day
before)
Phone: 983-1892
Email: Lautzma@earlham.edu
The study of money and capital markets has been undergoing significant changes recently.
In order to understand where the study is at present, we will attempt to trace its
development. This course has several objectives identified broadly by its organization.
The course is organized into three parts. Part I provides an introduction to modern
(quantitative) asset pricing. This part of this course will cover the theory of modern
portfolio theory and options pricing. You should be award that this part of the course is
theoretical drawing upon economics and statistics. Part II of the course will begin by
covering the empirical evidence of modern asset pricing studied in the first part. We will
see that a challenge has been made to the empirical strength of the theory, creating space
for the relatively new branch of behavioral finance. In addition, we will study the latest
valuation models. This part of the course will be much more applied drawing in part on
accounting. After Fall break, we will spend time doing a valuation project. The project
will require you to analyze a particular company and apply various valuation methods.
Readings and assignments will be posted on the course webpage (note that this is not a
moodle website) at http://www.earlham.edu/~lautzma
Grading: Exam 1
30%, Exam 2 30%, Project 30%, Homework
Tentative Course Schedule
Part I: Asset Pricing Theory
Week 1 (8/24-8/26)
Introduction and Overview
Week 2 (8/29-9/2)
Class Notes, Ch. 3
Continued Introduction and Begin Mean-Variance
Week 3 (9/5-9/9)
Class Notes, Ch. 4
Mean-Variance and the Separation Theorem
Week 4 (9/12-9/16) The Capital Asset Pricing Model
Class Notes, Ch. 5
Perold, “The Capital Asset Pricing Model”, JEP, 2004, Summer.
10%
Week 5 (9/19-9/23) Introduction to Derivatives
Powerpoint Presentation
Stultz, “Should We Fear Derivatives?”, JEP, 2004, Summer.
Week 6 (9/26-9/30) Options Pricing
Darden, “Binomial Option Pricing”
Jarrow, “In Honor of the Nobel Laureates Robert C. Merton and Myron S. Scholes: A
Partial Differential Equation That Changed the World”, JEP, 1999, Autumn.
Week 7 (10/3-10/7)
Review and Exam 1 on Friday, 10/7
Part II: Towards Fundamental Analysis
Week 8 (10/10-10/14)
Empirical Issues with Asset Pricing Theory
Lo, “Efficient Market Hypothesis”
Fama & French, “CAPM: Theory and Evidence”, JEP, 2004, Summer
Malkiel, “The Efficient Market Hypothesis and Its Critics”, JEP, 2003, Winter
Week 9 (10/17-10/21)
Behavioral Finance
st
(No Class on Friday, Oct. 21 --- Early Semester Break)
Thaler, “Behavioral Economics”
Shiller, “From Efficient Markets Theory to Behavioral Finance”, 2003, Winter.
Week 10 (10/24-10/28)
Behavioral Finance and Intro to Valuation
Shliefer & Summers, “The Noise Trader Approach to Finance”, JEP, 1990, Spring
Class Notes, Chapter 9
Week 11 (10/31-11/4)
Two Valuation Models
Class Notes, Chapter 9
Damodaran, “Valuation Approaches and Metrics: A Survey of the Theory and Evidence”
Week 12 (11/7-11/11)
Relative Valuation
Class Notes, Chapter 9
Damodaran, “What is the riskfree rate? A Search for the Basic Building Block” and
“Equity Risk Premiums (ERP): Determinants, Estimation and Implications”
Week 13 (11/14-11/18)
Review and Exam 2 on Friday 11/18
Week 14 (11/21-11/25)
No Class --- Fall Break
Part III: Valuation Project
Week 15 (11/28-12/2)
Week 16 (12/5-12/9)
Week 17 (12/12-12/16)
Valuation Project
Valuation Project
Valuation Project due on Wednesday, Dec. 16 by Noon