Optimization and Incomplete Markets with Applications

Lecturer: Prof. Teemu Pennanen
Period: April 1st to April 17th, Monday to Wednesday
Time: 6pm to 7:40pm
Teaching Assistance: Thurdays same time as the lecture by Sergio Maffra
Room: 537 (Mondays and Tuesdays) and 414 (Wednesday and Thrusdays)

Syllabus: The minicourse gives an introduction to financial economics in terms of basic optimization theory. We provide a unified treatment of financial risk management, accounting, and asset pricing in a simple discrete-time asset-liability management model that avoids many of the technicalities associated with traditional continuous-time models. This leaves room for practical considerations that are often neglected in more mathematical texts. In particular, the approach allows for nonlinear illiquidity effects and portfolio constraints which are significant in practice but invalidate much of the classical theory of financial mathematics.

The course begins with a review of basic convex analysis that forms the mathematical basis of the theory. The developed economic concepts and results are illustrated with practical applications ranging from the pricing of exotic options and commodity derivatives to liability valuation in pension schemes.

Lecture notes for the first part of the course (Convex Optimization) can be found here. For the second part (Incomplete Markets), click here. Slides from the first tutorial.