The economics of risk and time
Ph. D. Course - Wuhan University
Christian Gollier (Toulouse University)
March 2003
The goal of this course is to offer an introduction to the new developments in the economics of uncertainty, with applications to finance. Some of the main issues are the following:
The course will be based on my book published in 2001 with MIT Press that is entitled “The economics of risk and time”.
Short Biography
Christian Gollier is Professor at the University of Toulouse. In the recent years, he published over 60 papers in the leading scientific journals in economics (Econometrica, Review of Economic Studies, Journal of Economic Theory, …) His main field of interest is the impact of risks on behaviors and prices. He is one of the main authors participating to the recent developments of expected utility theory. He solved the question of whether longer time horizon induces taking more risk, or whether a better social insurance could make households to invest more in stock markets. He is also interested about the management of irreversible decisions in a world with scientific uncertainty, with applications to global warming and nuclear management. In 201, he published the book entitled “The economics of risk and time” (MIT Press) which was awarded the Paul A. Samuelson Award.
The schedule of the class will be the following:
8:30-11:30 Lecture 1: Risk preferences
Expected utility
Risk aversion
References: Pratt, J.W., (1964), Risk aversion in the small and in the large, Econometrica, 32, 122-136.
Gollier, C., (2001), The economics of risk and Time, MIT Press, Chapters 1 and 2.
1:30-4:30 Lecture 2: Static portfolio choices
Static portfolio choices
The effect of background risk
References: Gollier, C., and J.W. Pratt, (1993), Risk vulnerability and the tempering effect of background risk, Econometrica, 64, 1009-1024.
Gollier , C., (2001), The economics of risk and Time, MIT Press, Chapters 4 , 6 and 9.
Tuesday 3/11: Asset pricing
8:30-11:30 Lecture 3: A theory of asset prices
The demand for contingent claims
The consumption-based asset pricing model (CCAPM)
The equity premium puzzle
References: Lucas, R., (1978), Asset prices in an exchange economy, Econometrica, 46, 1429-1446.
Gollier , C., (2001), The economics of risk and Time, MIT Press, Chapters 6 and 13.
1:30-4:30 Exercises on portfolio choices and asset pricing
Wednesday 3/12: Risk and time I
8:30-11:30 Lecture 4: Dynamic portfolio management
Should younger people purchase more stocks?
References: Mossin, J., (1968b), Optimal multiperiod portfolio policies, Journal of Business, 215-229.
Gollier , C., (2001), The economics of risk and Time, MIT Press, Chapters 11 and 14.
1:30-4:30 Lecture 5: Consumption and savings under uncertainty
Consumption under certainty
Precautionary savings and prudence
The equilibrium price of time
The yield curve
References: Kimball, M.S.,(1990), Prudence in the small and in the large, Econometrica, 58, 53-73.
Gollier , C., (2001), The economics of risk and Time, MIT Press, Chapters 15, 16 and 17.
Thursday 3/13: Risk and time II
8:30-11:30 Exercises on dynamic risk management
1:30-4:30 Lecture 6: Disentangling risk and time
Kreps-Porteus preferences
Precautionary savings revisited
References: Kreps, D.M., and E.L. Porteus, (1978), Temporal resolution of uncertainty and dynamic choice theory, Econometrica, 46, 185-200.
Gollier , C., (2001), The economics of risk and Time, MIT Press, Chapter 20.
Friday 3/14: Aggregation of preferences
1:30-4:30 Lecture 7: Risk sharing
Efficient risk sharing
The preferences of the representative agent
References: Wilson, R., (1968), The theory of syndicates, Econometrica, 36, 113-132.
Gollier , C., (2001), The economics of risk and Time, MIT Press, Chapters 21 and 23.
1:30-4:30 Exercises on aggregation of preferences
Tuesday 3/18 to Thursday 3/20:
9:00-11:00 Open discussions, exercises and student presentations
1:30-4:30 Office hours
Exam: Friday 3/21 9:00-10:30
