MASTER IN QUANTITATIVE ECONOMICS AND FINANCE

Joint program offered by HEC Paris and Ecole Polytechnique

Program co-directors: Tristan Tomala

HEC Paris, [email protected]
Raicho Bojilov
Ecole Polytechnique, [email protected]

Administrative coordinator: Mary Joyce Ah Sue

[email protected]

Homepage: https://studies2.hec.fr/jahia/Jahia/master-qef

1. THE MASTER PROGRAM

This Master program is linked to the following institutions:

- the Department of Applied Mathematics and the Department of Economics at the Ecole Polytechnique
- the Department of Economics & Decision Sciences and the Department of Finance at HEC.

Courses are delivered on both campuses.

The objective of the program is two-fold:

- to provide students with a fundamental understanding of the concepts and methods underlying Economics
and Finance and prepare them for a career in quantitative or research-oriented jobs, namely academic jobs.
- to give students an opportunity to carry out advanced research projects through the second-year program
onto a PhD program.

The language of instruction and for examinations is in English. A solid background in Mathematics is a
prerequisite.

2. PROGRAM STRUCTURE

In the first term (September-December) students are required to complete a set of general core courses.

In the second term (January-March), students have to choose either the Economics track or the Finance track.

During the third period of the year, students must complete a research internship of at least 12 weeks in a
research laboratory or equivalent institution in France or abroad, exploring a list of topics proposed by the
academic departments.

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3. PROGRAM OF STUDY

First term
Compulsory

Econometrics Bruno Crépon - Philippe Février (X)

Macroeconomics: Growth Pierre Cahuc - Alessandro Riboni (X)

Microeconomics Jeanne Hagenbach - Eduardo Perez (X)

Choose 1

Economics of Uncertainty and Finance Eduardo Perez (X)

Game Theory and Economic Analysis Yukio Koriyama - Rida Laraki (X)

Compulsory support courses

Mathematics for Economics Tristan Tomala (HEC)

Probabilty Theory Lucas Gerin (X)

Second term - Finance track

Compulsory

Asset Pricing Bruno Denize-Bouchard (HEC)

Asset Pricing in the Derivatives Market Peter Tankov (X)

Corporate Finance François Derrien - David Thesmar (HEC)

Financial Econometrics Laurent Calvet (HEC)

Second term - Economics Research track

Compulsory

Applied Microeconometrics Philippe Février (X)

Choose 3

Advanced Microeconomics Mohammed Abdellaoui - Nicolas Vieille (HEC)

Decision Theory Itzhak Gilboa (HEC)

Development Economics Eric Strobl (X)

Economics of Contracts Raicho Bojilov (X)

Financial Macroeconomics Benoit Mojon (X)

Macroeconomics: Business Cycles Jean-Baptiste Michau (X)

Each course carries 4 credits.

Students who successfully complete the requirements of the program earn a Master of Science degree in
Management.

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4. WHAT NEXT? OPTIONS AFTER THE MASTER

Once they have completed their Master in Quantitative Economics and Finance, students may

1) choose a career in industry or

2) pursue a second Master’s degree (M2) in one of the following fields (see below)
- either for its own sake or
- as a preparation to a PhD enrolling either in
HEC Paris http://www.hec.edu/Ph.D
or
Ecole Polytechnique http://www.graduateschool.polytechnique.edu/accueil-graduate-
school/doctorat/presentation-de-l-ecole-doctorale-67534.kjsp

Enrolment in one of the second year Master M2 programs will depend on track chosen in the Master program
in Quantitative Economics and Finance and will be subject to results and validation of the Master of Science
degree in Management.

Master M2 Programs in Economics and Finance:

* Master “Analyse et Politique Économiques”

Ecole Polytechnique - HEC Paris
http://www.parisschoolofeconomics.eu/fr/formations-et-vie-etudiante/programme-ape/
(all courses are taught in English)
* Master “Économie du Développement Durable, de l’Environnement et de l’Énergie”
http://www.agroparistech.fr/-Master-EDDEE-.html
* Master “ Economics of Markets and Organizations”
Ecole Polytechnique - Toulouse School of Economics
http://www.graduateschool.polytechnique.edu/home/master-s-programs/our-master-s-programs/m2-
economics-of-markets-and-organizations-30957.kjsp
(all courses are taught in English)

Master M2 Programs in Applied Mathematics:

* Master “Mathématiques de la Modélisation”, parcours “Optimisation, Jeux et Modélisation

Économique”
http://www.ljll.math.upmc.fr/ojme/

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5. COURSE CONTENT

ECONOMETRICS
Instructor: Bruno Crépon, [email protected] ,

This course focuses on the statistical tools needed to understand empirical economic research.

Course outline

1. Ordinary least squares: geometric, statistical and asymptotic properties

2. Ordinary least squares: Heteroskedasticity (with applications to panel data and times series)
3. Instrumental variables
4. Generalized method of moments (with applications to endogenous variables)
5. Selectivity
6. Evaluation

MACROECONOMICS: GROWTH
Instructors: Pierre Cahuc, [email protected] , Alessandro Riboni, [email protected]

This course is devoted to the analysis of growth and cycles. The first part presents stylized facts about
economic growth in the long term in a historical and an international perspective. Then theoretical and
empirical approaches are used to shed light on the industrial revolution of the eighteen and the nineteen
centuries and on the economic growth of modern economies. The second part analyzes cycles with
applications to monetary policy and international economics.

Course outline

1. The source of economic growth

2. Saving, accumulation of capital and growth
3. Technological progress and creative destruction
4. Growth and unemployment
5. Cycle : stylized facts
6. Keynesian cycles and Lucas’ critic
7. Real cycles and optimal fluctuations
8. International cycles
9. Cycles and monetary policy

References

- Aghion, P. and Howitt, P. (1998), Endogenous Growth Theory, MIT Press

- Barro, R. and Sala-I-Martin, X. (2003), Economic Growth, McGraw-Hill Advanced Series in Economics
- T. Cooley and E. Prescott , Chapter 1, Frontiers of Business Cycle Research, Princeton University Press
- Hairault, J.O. 1995, Les Fluctuations conjoncturelles, Economica
- R. King and S. Rebelo , (2000), Resuscitating Real Business Cycles, Handbook of Macroeconomics

MICROECONOMICS
Instructors: Jeanne Hagenbach, [email protected],
Eduardo Perez, [email protected]

Course Objective

This course provides the fundamental concepts of microeconomic analysis. The course first focuses on general
equilibrium theory, before introducing market failures (imperfect competition and public economics).

Course outline

1. Individual Choice Theory

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2. Supply
3. Demand
4. Partial equilibrium
5. General equilibrium
6. Public Economics
7. Imperfect competition

Textbooks

- A. Mas-Colell, J. Green et M. Whinston, « Microeconomic Theory », Oxford University Press, 1995

- B. Salanié, « Microeconomics of Market Failures », MIT Press, 2000

ECONOMICS OF UNCERTAINTY AND FINANCE

Instructor: Eduardo Perez, [email protected]

The aim of this course is to provide students with a working knowledge of the conceptual tools and the basic
models of demand for risk and portfolio selection. A particular focus will be placed on the notions of
equilibrium, and information asymmetry.

Course outline

1. Introduction: What is finance? The financial system, instruments and markets

2. Interest rates, compounding and bond pricing: Net present value and discounting, Term structure of
interest rates
3. Valuing income streams under certainty: Life-cycle savings: What determines interest rates? Production,
impatience and equilibrium interest rates
4. Valuing income streams under uncertainty: State-space representation of uncertainty, von Neuman-
Morgenstern utility, Risk aversion and risk premia, Arrow securities and portfolios, state prices and
equilibrium asset pricing, optimal mean-variance portfolios, the Capital Asset Pricing Model,
Introduction to the arbitrage pricing model
5. CAPM and corporate financing: the Modigliani-Miler theory: debt and equity
6. The efficient markets hypothesis: a theoretical explanation, some empirical findings
7. Derivatives and arbitrage pricing: the basic theory of arbitrage pricing, option pricing

GAME THEORY AND ECONOMIC ANALYSIS

Instructors: Rida Laraki, [email protected], Yukio Koriyama, [email protected]

Game theory is a mathematically formalized theory of strategic interactions. One important field of application
is economics, where game theory is used to analyze a vast variety of interactions, ranging from individuals
within organizations, to firms competing in markets and nations engaged in international negotiations. In most
instances, no single party, or player, can determine the outcome single-handedly; the outcome usually depends
on several or all participants' behavior.

What is a player's best current move depends in part on moves already made, expected future moves, and on
how others’ future moves are influenced by the player’s own current move. Hence, players' actions,
information and expectations may be intertwined in a complex and fascinating pattern. The analysis of these
interdependences is precisely what game theory is all about.

This course provides an introduction to non-cooperative and evoutionary game theory, two main fields within
game theory. Our course contains rigorous mathematics as well as a variety of applications to economics. We
will also briefly consider applications to political science (rational voting and electoral competition) and biology
(adaptation of behaviors towards optimality). Participants will learn to master central game-theoretic concepts,
methods and results that are used in modern economics, political science and evolutionary biology.

Course outline

1. Introduction

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2. Informal examples
3. Preference representation
4. The extensive and normal forms
5. Normal-form analysis
6. Extensive-form analysis
7. Evolutionary stability
8. Population dynamics
9. Euclidean games
10. Repeated games

Readings

- J. Weibull (2009): Lecture Notes in Game Theory (Ecole Polytechnique, Polycopy). [required reading]
- M. Osborne (2004): An Introduction to Game Theory. Oxford University Press. [recommended as additional
reading]

MATHEMATICS FOR ECONOMICS

Instructor: Tristan TOMALA, [email protected]

The course covers basic mathematical tools that are used in a variety of research fields, with particular
emphasis on economics.

Course outline

1. Basic topology (metric and normed spaces, compact and complete sets, continuity of mappings and of
correspondences, differentiation : implicit function theorem)
2. Convex analysis (convex sets and functions, projection and separation, fixed points theorems)
3. Optimization (First and second order conditions, constraints, Kuhn Tucker theorems)
4. Introduction to dynamic optimization
5. Complements in probability and integration theory

Main reference

- A. Mas-Colell, M. Whinston and J. Green, Microeconomic Theory, Oxford, UK, Oxford Univ. Press 1995.
Mathematical appendix

PROBABILITY THEORY
Instructor: Lucas Gerin, [email protected]

The goal of this course is to introduce the main concepts in Probability Theory in a rigorous setting. Being at
ease with the notions presented in this course is essential in Economics and Finance.

Course Outline

1. Measure and Integration

2. The probabilistic model
3. Law of random variables
4. Random vectors
5. Convergence of random variables
6. Law of Large Numbers
7. Central Limit Theorems
8. Conditional expectation, conditional law

Bibliography

- BILINGSLEY, P., Probability and Measure, Wiley

- CHUNG, K.L., A course in Probability Theory, Academic Press

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- GRIMMET, G., STIRZAKER P. Probability and Random Processes, Oxford University Press

ASSET PRICING
Instructor: Bruno Bouchard, [email protected], Web: www.ceremade.dauphine.fr/~bouchard/

Objective
This course is an introduction to the modern theory of asset pricing and portfolio theory. It develops
foundations for more specialized courses on securities valuation (e.g., derivatives pricing, continuous time
finance, empirical estimation of asset pricing models, market microstructure etc...). Topics covered include (i)
CAPM, mean-variance analysis, CCAPM, Arrow-Debreu pricing, factor pricing, arbitrage, (ii) asymmetric
information and asset pricing, and (iii) derivative pricing in discrete time models.

Organization

1. The course is organized in 8 sessions of four hours.

2. Evaluation: Final exam (open-book): 100% of the final grade.
3. Presence is compulsory.

Textbooks

A good textbook for this course is: “Asset pricing” by George Pennachi, Pearson, 2008.
Other useful references are given in the course outline below. Readings for each week are only recommended
and not compulsory.
Slides of the lectures will be provided in advance.

Course outline

1. Lectures 1 and 2: Equilibrium in Security Markets

- Arrow Debreu Securities
- Competitive equilibrium
- Complete/Incomplete market
- Pareto optimality and risk sharing
- Stochastic discount factor, risk neutral probabilities, pricing kernel
- Fundamental pricing equation (Consumption based CAPM; one period)
Reading: Pennachi, Chapter 4
2. Lectures 3 and 4: Mean Variance Analysis, CAPM
- Efficient Frontier
- Sharpe ratio
- CAPM
- Factor pricing (APT)
- Beta pricing
- Factor pricing and CAPM
- Tests of CAPM and zero-beta CAPM
Reading: Pennachi, Chapters 2 and 3; Cochrane, Chapter 9, Fama and French (1992), (1993)
3. Lecture 4 and 5: Multi-period extensions
- Consumption-based CAPM: Multi-period extension
- Risk-free rate and Equity Premium puzzle
- Hansen-Jagannathan Bounds
- Bellman dynamic programming principle
- Lucas’ model
Reading: Pennachi, Chapters 5 and 6
4. Lecture 5 and 6: Toward a resolution of the risk free rate and equity premium puzzles
- Epstein and Zin GEU
- Habit formations
- Keeping up with the Joneses
- Prospect theory
- Frictions and liquidity adjusted CAPMl
5. Lecture 6 and 7: Asset Pricing with asymmetric information
- Competitive equilibrium with private information: Grossman’s model
- Rational expectations and revealing equilibrium
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 - Kyle’s model of insider trading
- Adverse selection and liquidity
Reading: Pennachi, Chapter 16

6. Lecture 7and 8 : Introduction to no-arbitrage pricing of derivatives

- No-arbitrage in liquid/complete markets and option pricing
- The impact of transaction costs

References for readings

- Cochrane J. (2001), “Asset Pricing”, Princeton University Press

- Fama, E. and French, K. (1992), “The cross-section of expected stock returns”, Journal of Finance, 47, 427-465
- Fama, E., and French, K. (1993), “Common risk factors in the returns on stocks and bonds”, Journal of
Financial Economics, 33(1), 3-56

ASSET PRICING IN THE DERIVATIVES MARKET

Instructor: Peter Tankov, [email protected]

Derivative securities provide an important tool for the investors to protect themselves against market risks in
the future. This course concentrates on the theory of pricing and hedging by means of the no-arbitrage theory
introduced by Black and Scholes. We first study the case of finite discrete-time financial markets: after
characterizing financial markets which contain no arbitrage opportunities, we study the minimal cost of super-
hedging some given contingent claim, and we show that this solves the hedging, pricing, and portfolio
allocation problems in the context of complete markets.
We next turn to continuous-time financial markets, which can be viewed as the limit of finite discrete time
markets when the time step shrinks to zero. This leads naturally to the Brownian motion as the continuous-
time limit of the scaled random walk. We provide an introduction to the main concepts from stochastic calculus
which are needed for the understanding of the Black-Scholes pricing and hedging model for Vanilla and barrier
options, and we present an overview of the Gaussian Heath-Jarrow-Morton model for the term structure of
interest rates.

CORPORATE FINANCE
Instructors: François Derrien, [email protected], Office # 36 (Building W2),  01 39 67 72 98
David Thesmar, [email protected], Office #32 (Building W2),  01 39 67 94 12

Course description

This course is an introductory graduate class to corporate finance. Its main objective is to give students
exposure to the state of the art research in corporate finance. It is organized in topics.

The first part, taught by Professor François Derrien, will present an overview of theories and empirical evidence
on capital structure decisions of firms, the real effects of financial shocks, Takeovers and Corporate
Governance, and initial public offerings.

The second part, taught by Professor David Thesmar, will cover three adjacent fields that are increasingly taken
up by corporate finance researchers: Entrepreneurship, banking and financial intermediation, and finally
household finance. Some of the research (in particular in financial intermediation and household finance)
covered has grown out of the recent financial crises. Emphasis will be put on the lessons drawn for regulation.

FINANCIAL ECONOMETRICS
Instructor: Laurent Calvet, [email protected], http://www.hec.fr/calvet

- Calvet, Laurent E., and Adlai J. Fisher (2008). Multifractal Volatility: Theory, Forecasting and Pricing.
Elsevier – Academic Press. [CF]

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- Campbell, John, Andrew Lo, and Craig MacKinlay (1996). The Econometrics of Financial Markets. Princeton
University Press. [CLM]
- Gouriéroux, Christian, and Alain Monfort (1996). Simulation-Based Econometric Methods.
Oxford University Press. [GM]
- Maronna, Ricardo A., R. Douglas Martin, and Victor J. Yohai (2006). Robust Statistics: Theory and Methods.
Wiley, London. [MMY]

Course outline

1. Maximum Likelihood Estimation and Generalized Method of Moments

*CLM: Technical Appendix on Estimation Techniques

Hamilton, James (1994). Time Series Analysis. Princeton University Press, ch. 5 and 14.
Hansen, Lars (1982). “Large sample properties of generalized method of moments estimators.”
Econometrica 50, 1029-1054.

Newey, Whitney, and Daniel McFadden (1994). “Large sample estimation and hypothesis testing.” In
Handbook of Econometrics vol 4, Robert Engle and Daniel McFadden editors, Elsevier – North
Holland.

Newey, Whitney, and Kenneth West (1987). “A simple, positive semi-definite, heteroscedasticity
and autocorrelation consistent covariance matrix.” Econometrica 55, 703-708.

2. Regime-Switching Models

*Hamilton, James (1994), ch. 22.

*Hamilton, James (2008). “Regime-switching models.” In The New Palgrave Dictionary of Economics.
Second Edition. Eds. Steven N. Durlauf and Lawrence E.Blume. Palgrave Macmillan.

Hamilton, James (1989). “A new approach to the economic analysis of nonstationary time series and
the business cycle.” Econometrica 57, 357-84.

3. Dynamics of Financial Returns

a. ARCH and GARCH

*CLM, ch 12.2: Models of Changing Volatility.

Andersen, Torben, and Tim Bollerslev (1998). ”Answering the skeptics: yes, standard volatility
models do provide accurate forecasts.” International Economic Review 39, 885-905.
Bollerslev, Tim (1986). “Generalized Autoregressive conditional heteroskedasticity.” Journal of
Econometrics 31, 307-327.

Bollerslev, Tim, Robert F. Engle, and Daniel Nelson (1994). “ARCH Models.” In Handbook of
Econometrics vol 4, Robert Engle and Daniel McFadden editors, Elsevier – North Holland.

Engle, Robert F. (1982). “Autoregressive conditional heteroskedasticity with the estimates of the
United Kingdom inflation.” Econometrica 50, 987-1008.

Hansen, Peter, and Asger Lunde (2005). “A forecast comparison of volatility models: Does anything
beat a GARCH(1,1)?” Journal of Applied Econometrics 20, 873-89.

Pagan, Adrian, and William Schwert (1990). “Alternative models for conditional stock volatility.”
Journal of Econometrics 45, 267-90.

West, Kenneth, and Dongchul Cho (1995). “The predictive ability of several models of exchange rate
volatility.” Journal of Econometrics 69, 367-91.

b. Stochastic Volatility

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 Andersen, Torben, and Luca Benzoni (2008). “Stochastic volatility.” In Encyclopedia of Complexity
and System Science, ed. B. Mizrach. Springer.
Andersen, Torben, and Bent Sorensen (1996). ”GMM estimation of a stochastic volatility model: a
Monte Carlo study.” Journal of Business and Economic Statistics 14, 328-52.
Barndorff-Nielsen, Ole, and Neil Shephard (2001). “Non-Gaussian Ornstein-Uhlenbeck-based models
and some of their uses in financial economics.” Journal of the Royal Statistical Society B 63: 167-241.

Comte, Fabienne, and Eric Renault (1998). Long memory in continuous time stochastic volatility
models. Mathematical Finance 8, 291-323.

Hull, John, and Alan White (1987). The pricing of options on assets with stochastic volatility. Journal
of Finance 42, 281-300.

Taylor, Stephen (1986). Modeling Financial Time Series. John Wiley and Sons.

Wiggins, J. B. (1987), Option values under stochastic volatility: theory and empirical estimates,
Journal of Financial Economics 19, 351-372.

c. Multifrequency Modeling

*CF, ch. 1-4.

*Calvet, Laurent E., and Adlai J. Fisher (2004). “How to forecast long-run volatility: regime-switching
and the estimation of multifractal processes.” Journal of Financial Econometrics 2, 49-83.

Bacry, Emmanuel, Alexey Khozhemyak, and Jean-François Muzy (2008).

“Continuous cascade models for asset returns.” Journal of Economic Dynamics and Control 32(1),
156-99.

Calvet, Laurent E. (2008). “Fractals.” In The New Palgrave Dictionary of Economics. Second Edition.
Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan.

Calvet, Laurent E., and Adlai J. Fisher (2001). “Forecasting multifractal volatility.” Journal of
Econometrics 105, 27-58.

Calvet, Laurent E., Adlai J. Fisher, and Samuel B. Thompson (2006). “Volatility comovement: a
multifrequency approach.” Journal of Econometrics 131, 179-215.

Lux, Thomas (2008). “The Markov-switching multifractal model of asset returns: GMM estimation
and linear forecasting of volatility.” Journal of Business and Economic Statistics 26, 194-210.

d. Pricing Multifrequency Risk

*CF, ch. 9-10.

Calvet, Laurent E., and Adlai J. Fisher (2007). “Multifrequency news and stock returns.” Journal of
Financial Economics 86, 178-212.

4. Simulation-based Econometric Method

a. Simulated Method of Moments

*GM, ch. 2.

Duffie, Darrell, and Kenneth J. Singleton (1993). “Simulated moments estimation of Markov models
of asset prices.” Econometrica 61 (4), 929–52.

Lee, Bong-Soo, and Ingram, Beth (1991). “Simulation estimation of time series models.” Journal of
Econometrics 47, 197-205.

b. Indirect Inference and Efficient Method of Moments

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 *GM, ch 4.
Andersen, Torben G., Hyung-Jin Chung, and Bent E. Sorensen (1999). “Efficient method of moments
estimation of a stochastic volatility model: A Monte Carlo study.”Journal of Econometrics 91 (1), 61-
87.

Gallant, A. Ronald, and George Tauchen (1996). “Which moments to match?”.Econometric Theory
12, 657-681.

Gouriéroux, Christian, Alain Monfort, and Eric Renault (1993). “Indirect inference.”Journal of Applied
Econometrics 8, S85–S118.

Heggland, K. and Frigessi, A. (2004). “Estimating functions in indirect inference.”Journal of the Royal
Statistical Society, Series B 66, 447–62.

Sentana, Enrique, Giorgio Calzolari, and Gabriele Fiorentini (2008). “Indirect estimation of large
conditionally heteroskedastic factor models, with an application to the Dow 30 stocks.” Journal of
Econometrics 146 (1), 10–25.

Smith, Anthony A. (1993). “Estimating nonlinear time series models using simulated vector
autoregressions.” Journal of Applied Econometrics 8, S63–S84.

5. Filtering

a. The Kalman Filter

Hamilton, James (1994). Time Series Analysis. Princeton University Press, ch. 13.

b. Particle Filters

Arulampalam, Sanjeev, Simon Maskell, Neil Gordon, and Tim Clapp (2002). “A tutotrial on particle filters
for online nonlinear/non-Gaussian Bayesian tracking.” IEEE Transactions on Signal Processing 50(2) 174-
188.

Calvet, Laurent E., and Veronika Czellar (2011). “Efficient estimation of learning models.” Working
Paper, HEC Paris.

Chopin, Nicolas (2004). “Central limit theorem for sequential Monte Carlo methods and its applications
to Bayesian inference.” Annals of Statistics 32(6), 2385–2411.

Crisan, Dan, and Arnaud Doucet (2002). “A survey of convergence results on particle filtering methods
for practitioners.” IEEE Transactions on Signal Processing 50(3) 736–746.

6. Robust Statistics

*MMY, ch. 4 and 5.

Czellar, Veronika, G. Andrew Karolyi, and Elvezio Ronchetti (2007). “Indirect robust estimation of the
short-term interest rate process.” Journal of Empirical Finance 14,546–63.

Czellar, Veronika, and Elvezio Ronchetti (2010). “Accurate and robust tests for indirect inference.”
Biometrika 97(3), 621-630.
Dell’Aquila, Rosario, Elvezio Ronchetti, and Fabio Trojani (2003). “Robust GMM analysis of models for
the short rate process”, Journal of Empirical Finance 10, 373–397.

Hampel, Frank R., Elvezio M. Ronchetti, Peter J. Rousseeuw, and Werner A. Stahel (1986), Robust
Statistics: The Approach Based on Influence Functions, Wiley-Interscience, New York.

Ortelli, Claudio, and Fabio Trojani (2005). “Robust efficient method of moments.”Journal of
Econometrics 128, 69–97.

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 Zaman, Asad, Peter J. Rousseeuw, and Mehmed Orhan (2001). “Econometric applications of high
breakdown robust regression techniques.” Economics Letters 71,1-8.

APPLIED MICROECONOMETRICS
Instructor: Philippe Février, [email protected]

Four sessions are planned, each session being dedicated to a specific theme and specific tools.

1. Empirical industrial organization: evaluation of mergers

2. Empirical analysis of auctions
3. Empirical analysis of insurance contracts
4. Empirical assessment of public policies

ADVANCED MICROECONOMICS
Instructors: Nicolas Vieille, HEC-Paris, [email protected]
Mohammed Abdellaoui, HEC-Paris & GREG-HEC / CNRS, [email protected]

This is a combination course of Advanced Game Theory and Prospect Theory for Risk and Uncertainty.

1. Advanced Game Theory Course Outline

The course may briefly review some fundamental concepts of game theory, depending on the need for such a
review. Then it will address a few selected topics, with economic applications.

1. Games of incomplete information (and auctions)

2. Repeated games (and collusion issues)
3. Cooperative games and matching theory
4. Behavioral and experimental game theory

2. Prospect Theory Course Description

Experimental investigations dating from the early 1950s have revealed a variety of violations of expected utility
(EU), the standard model of rational choice under uncertainty. Since the end of the 70’s, an enormous amount
of effort was devoted to elaborate descriptively viable (fitting the facts) and formally sound generalizations of
1
EU. These alternatives are named “Non-expected utility” models. The course will focus on Prospect Theory
(PT), one of the most popular descriptive generalization of EU (extensively used in behavioral
economics/finance). More specifically, the course have two bjectives: (i) providing a formal setup that can help
easily understanding where PT deviates from EU and rank-dependent utility (RDU); and (ii) giving the basic
2
tools allowing to test and/or measure individual preferences under risk and uncertainty without assuming EU.

Course requirements

A final examination will take place at the end of the course. The participant will also be asked to prepare a
short research report (about 10 pages) on a recent research paper (theoretical or experimental).

Course outline

1. Formal setup
(Preference relations on Cartesian Products, monotonicity, coordinate independence, tradingoff
outcomes, additive representation of preferences)
2. Consistent tradeoffs under uncertainty
(How to measure utility using tradeoffs with known and unknown probabilities; how to test consistency;
consistency conditions for EU and RDU)
___________________
1
There is no overlap between this course and the course given by Prof. Gilboa (Introduction to Decision under
2
Uncertainty). The two courses are complementary. This includes explaining few economic implications of the
introduction of probability weighting and loss aversion

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3. From rank-dependent utility to Prospect Theory
(Final asset positions versus gains and losses, reference point, loss aversion, Rabin’s paradox)
4. Prospect Theory under Risk
(Axioms and empirical elicitation of preferences under risk, i.e. utility, probability weighting functions and
loss aversion)
5. Prospect Theory under Uncertainty
(Axioms and empirical elicitation of decision weights when probabilities are unknown)
6. Empirical Evidence on Ambiguity under PT
(How to elicit ambiguity attitudes under PT, attitudes towards different sources of uncertainty)

Textbooks

Additive representation of preferences

- Krantz, David H., R. Duncan Luce, Patrick Suppes, & Amos Tversky (1971), Foundations of Measurement, Vol. I
(Additive and Polynomial Representations). Academic Press, New York (2nd edition 1999, Dover)
- Keeney, Ralph & Howard Raiffa (1976): Decisions with Multiple Objectives. Wiley,New York (2nd edition 1993,
Cambridge University Press, Cambridge)
- Wakker, Peter (2010): Prospect Theory for Risk and Ambiguity, Cambridge

Theoretical and experimental results on RDU and Prospect Theory

- Wakker, Peter (2010): Prospect Theory for Risk and Ambiguity, Cambridge

Course material

You will receive by e-mail a link allowing to download the available material

DECISION THEORY: INTRODUCTION TO DECISION UNDER UNCERTAINTY

Instructor: Itzhak Gilboa, [email protected], Office hours: by appointment

The course will emphasize the conceptual foundations of the theory, as well as the mathematical ones. Results
will be proven in class when practical, at least in simple versions.

Parts I-IV describe classical theory. In passing, we will discuss deviations from the theory, newer theories, and
the like, but these will not be the focus of attention.
Parts V-VI describe newer developments, which violate some of the classical assumptions. It will be argued that
these deviations are not necessarily irrational. Thus, the course does not directly deal with psychological biases
or “mistakes”.

The course is designed to be taught alongside the course given by Professor Abdellaoui, and these courses are
complementary.
The course will have some overlap with the APE course on decision theory (given by Gilboa), but this will be
kept to a minimum, so that it would make sense for a student to take both courses.

List of topics

1. Utility Theory: Choice functions and binary relations; representation of a binary relation by a utility
function; semi-orders; ordinal and cardinal utility
2. Subjective Probability: de Finetti’s representation theorem
3. Decision under Risk: von Neumann-Morgenstern theorem
4. Decision under Uncertainty: Savage’s theorem
5. Non-Additive Probabilities: Schmeidler’s theorem (Choquet Expected Utility)
6. Multiple Priors: Maxmin expected utility; the relationship to Choquet expected utility and cores of
convex games; alternative models

Requirements

There will be a final examination, as well as one or two midterm examinations. Homework assignments will be
given as we go along, but will not be graded.

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Textbooks

- Fishburn, P.C. Utility Theory for Decision Making. John Wiley and Sons, 1970
- Gilboa, I. Theory of Decision under Uncertainty. Cambridge University Press (Econometric Society
Monograph Series, no.45), 2009
- Kreps, D. Notes on the Theory of Choice. Westview Press: Underground Classics in Economics, 1988
- Savage, J. L. The Foundations of Statistics. John Wiley and Sons, 1954/1972

DEVELOPMENT ECONOMICS
Instructor: Eric Strobl, [email protected]

Course outline

1. Poverty and Inequality

2. Intra-Household Allocation
3. Household Economies of Scale and Savings and Consumption Smoothing
4. International Trade and Development
5. The African Growth Tragedy

ECONOMICS OF CONTRACTS
Instructor: Raicho Bojilov, [email protected]

This course has a strong methodological component. It introduces basic models in contract theory (or
economics of information), which are illustrated through applications to price discrimination, taxation,
insurance, compensation policies, educational choice, auctions, and regulation. The course also presents some
concepts in dynamic contract theory, such as commitment, renegotiation, and incomplete contracts. Finally, it
relates the covered material to mechanism design.

The topics are presented through the Principal-Agent paradigm, i.e. the strategic interaction of two economic
agents within a Stackelberg game: one party who possesses information affecting the welfare of both
(informed party) and one who does not have this information (uninformed party). The information is either
about what the informed party does (hidden action) or about what her characteristics are (hidden
information). Depending on the type of information and who acts first, the course focuses on three types of
models:
• Screening models, which involve hidden information and in which the uninformed party acts first
• Signaling models, which again involve hidden information but the initiative belongs to the informed party
• Moral hazard models, which involve hidden action and the uninformed party moves first
It then considers some issues arising from the repeated interaction of the informed and uninformed parties. At
the end, the main topics of the course are reviewed within a brief introduction to mechanism design.

The course builds on basic concepts in game theory and decision-making under uncertainty. Knowledge of
strategic and extensive games of imperfect information is recommended. There are 9 main lectures (1:30 each)
followed by two-hour exercise classes whose purpose is to familiarize the students with the techniques
involved. Evaluation is based on a final written examination and weekly problem sets.

List of topics

1. Introduction to contract theory: information, uncertainty, and decisions

2. Screening: a basic model
3. Screening: extensions and applications
4. Signaling: review of related game theory and an introduction to auctions
5. Signaling: models of costly and costless signalling
6. Moral hazard: a basic model
7. Moral hazard: extensions and applications
8. Dynamic contracts
9. Introduction to mechanism design

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References

The following books are recommended as they cover part of the material for the course:
- Bolton, P., and M. Dewatripont. 2004. Contract Theory. Cambridge: MIT Press
- Fudenberg, D. and J. Tirole. 1991. Game Theory. Cambridge: MIT Press
- Laffont, J.-J. 1989. Economics of Information and Uncertainty. Cambridge: MIT Press
- Laffont, J.-J. and D. Martimort. 2001. The Theory of Incentives: the Principal – Agent Model. Princeton:
Princeton University Press
- Mas-Colell, A., J. Green, and M. Whinston. 1995. Microeconomic Theory. Oxford: Oxford University Press
- Salanié, B. 2005. The Economics of Contracts: a Primer. Cambridge: MIT Press

FINANCIAL MACROECONOMICS
Instructor: Benoît Mojon, [email protected]

Course description

The purpose of this class is to cover the monetary economics through the institutions that create and manage
money, how monetary policy interacts with the business cycle and how it is transmitted through the financial
system. The treatment of these "eternal" issues will be anchored in the analysis of recent and current events,
including monetary policy in the OECD countries since the 1970s and the ongoing financial and sovereign debt
crisis in the euro area.

The exercises will lead students to become familiar with macroeconomic and financial time series data.

Outline

1. Banks and the central bank

- Intermediation
- The balance sheet of the central bank
- The money multiplier
References: Freixas and Rochet banking textbook; ECB/FED; Drumetz and Pfister
2. Macroeconomic stabilisation policies
- A simple New Keynesian AD-AS model
- Monetary and fiscal policies
References: Benigno
3. The dominant monetary policy doctrine
- From the 1970s Great inflation to central bank independance
- Time inconsistency, inflation bias and delegation
- The Taylor principle and indeterminacy
- Inflation targeting
References: Benati and Goodhart Handbook chapter; Orphanides; Diron and Mojon
4. The transmission of monetary policy
- The yield curve
- The exchange rate channe
- The credit channel
References: Cochrane; Boivin, Giannnoni and Mojon
5. The liquidity trap
- The zero lower bound on interest rates
- Non conventional monetary policies
- The fiscal multiplier at the zero lower bound
References: Woodford AEJ 2009; Orphanides; Eggertson and Krugman
6. Financial cycles and crises
- Credit risk premia and credit rationing
- Credit cycles
- Bank runs
References: Freixas and Rochet textbook; Carlstrom and Fuerst; Holmstrom and Tirole; Diamond and Dybvig
7. Financial regulation
- Capital requirements

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 - Liquidiy requirements
- Margin calls
- Macro-prudential policies
References: Archava and Richardson; The Vikers Report
8. The euro area 2010-2011 crisis
- Exchange rates and monetary policy
- Real exchange rates and trade
- Optimal currency areas
- Public debt dynamics and multiple equilibria
- Euro bills and bonds
References: TBC

Main references

- Acharya and Richardson: Restoring Financial Stability: How to Repair a Failed System, Wiley Finance, 2010
- Benigno: A simple New Keynesian AD-AS model
- Boivin, Ginannoni and Mojon: The transmission of monetary policy in the euro area
- Drumetz et Pfister: La politique monétaire, De Boeck 2010
- Freixas and Rochet: Microeconomics of Banking, MIT press, 2008
- Woodford: The fiscal multiplier at the zero lower bound, AJE macro 2009

MACROECONOMICS: BUSINESS CYCLES

Instructor: Jean-Baptiste Michau, [email protected]

This course is an introduction to modern macroeconomics. Students are initially equipped with the necessary
tools to solve dynamic problems in economics. These techniques are then applied to address a number of
important issues in macroeconomics, including the analysis of the business cycle. All these issues are
investigated within a common framework which emphasizes the importance of microfoundations, rational
expectations and general equilibrium.
By the end of the course, students should have a reasonable knowledge of the current state of
macroeconomics, they should be able to read a large share of the recent academic literature in the field and
they should be able to address many macroeconomic policy questions.

Course outline

1. IS-LM, AS-AD, The Phillips Curve

2. Data and Methods
3. Dynamic Programming
4. The Ramsey model
5. Real Business Cycle Theory
6. The New Keynesian Framework
7. Asset Pricing
8. Search Models of the Labor Market
9. Heterogeneity in Macroeconomics

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