Asset pricing and risk analysis | UniBG Economics & Finance
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Asset pricing and risk analysis

Year: 1
Semester: 2
Lecturer: Prof. Giorgio Consigli

Hours: 48
ECTS: 6

Educational Goals

The course introduces the fundamentals of asset pricing and risk hedging strategies by investors and financial institutions, with a particular focus on the comprehension of risk sources and their widespread effects in quantitative asset and asset-liability models. 
Through this module, the students will learn:

  • To apply statistical models and market analysis to financial instruments, from low to high-risk assets.
  • To classify risk measures based on mathematical, axiomatic properties or relying on economic principles.
  • Develop asset pricing techniques in discrete and continuous time frameworks.
  • Decompose assets’ and portfolios’ risk sources, from market to credit risk.
  • Learn arbitrage-free fair pricing methods and hedging by portfolio replication.
  • Extend risk analysis to assess enterprise-wide risk management and apply risk capital evaluation.
  • Understand the rationale of risk capital assessment in the banking and insurance sectors.
  • Develop and solve portfolio models under regulatory constraints. 
Course Content

1. Introduction to financial and derivative markets

  • Statistical properties.
  • Risk analysis and risk factors decomposition.

2. Fixed-income theory and interest rates, Securitization 

  • Interest rate models and term structure of interest rates.

3. Option markets

  • Equity options, currency, compound, and stock indices.
  • Trading strategies.

4. Pricing

  • Markov property.
  • Risk-neutral pricing.
  • Binomial model.
  • Black-Scholes-Merton model.
  • Monte Carlo method.

5. Value at Risk and Conditional Value at Risk

  • Definition of risk measures and axioms.
  • Shortfall distribution.
  • Non parametric or model-based risk measurement.

6. Credit risk

  • Ratings, default probabilities and recovery rates.
  • Credit risk in derivatives deals.
  • Default correlation.
  • Risk assessment and economic cycle: regulatory pro-cyclical effects.
  • Credit VaR.

7. Enterprise-wide risk management and regulations

  • Regulatory principles: a brief history.
  • Regulatory frameworks: from Basel II to Basel IV.

8. Risk capital assessment in the insurance sector

  • Life and Property and casualty risk sources.
  • Asset-liability management in the insurance sector.
  • VaR and risk capital evaluation.
  • Solvency II regulatory framework.

9. Portfolio optimization under risk capital constraints

  • Risk-reward analysis under risk capital constraints.
  • Risk budgeting: a new approach to investing.
Teaching Methods

The course will combine classroom teaching (2/3) and laboratory sections with the use of pricing and risk analysis tools (1/3).

Assessment and Evaluation

Individual assessment through:

  • Classroom work.
  • A case-study development.
  • Final oral exam.