The University of North Carolina at Chapel Hill

Foundations of Macro-Finance

The course is a rigorous, quantitative analysis of consumption based asset pricing models. After carefully reviewing the basics of the representative consumer framework in a closed economy, we will be interested in understanding the way in which prices are determined in general equilibrium and the way in which leading theories perform when it comes to international asset pricing. Since a special attention will be devoted to developing the tools for solving recursive dynamic problems in theory and practice, basic knowledge of Matlab or Fortran is a prerequisite for this class. Meeting times are reported below: exceptions will be made for university holidays or designated well-being days.



Schedule
Mondays and Wednesdays, 3:30–5:00 p.m.


Location
McColl Building, Room 4106

References

Textbooks

  • RMT
    Recursive Macroeconomic Theory, Lars Ljungqvist and Thomas J. Sargent
  • COMP
    Applied Computational Economics and Finance, Mario J. Miranda and Paul L. Fackler
  • HS
    Robustness, Lars Peter Hansen and Thomas J. Sargent

Spring 2026

Course Outline and Materials

Classes 1–6
Consumption-Based Asset Pricing with a Representative Consumer


Jan. 7, 12, 14, 21, 26 & 28

  • RMT — Ljungqvist and Sargent, Chapter 13



  • Markov asset pricing



  • Hansen–Jagannathan bound



  • Homework 1



  • Homework 1 answer key



  • Homework 1 MATLAB answer key
Classes 7–8
Consumption-Based Asset Pricing with Multiple Consumers: Complete Markets


Feb. 2 & 4

  • RMT — Ljungqvist and Sargent, Chapter 8
Classes 9–10
Complete-Markets Equilibrium, Continued


Feb. 11 & 16

  • RMT — Ljungqvist and Sargent, Chapter 8



  • Pricing of redundant assets and Arrow securities



  • Homework 2
Classes 11–12
Asset Pricing with Recursive Preferences


Feb. 18 & 23



  • Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles — Ravi Bansal and Amir Yaron, Journal of Finance (2004)



  • Risk-Sensitive Real Business Cycles — Thomas D. Tallarini Jr., Journal of Monetary Economics (2000)



  • Recursive preferences: two-state example



  • Hansen–Jagannathan bound with recursive preferences



  • Bansal and Yaron baseline calibration



  • Campbell–Shiller approximation of the price-dividend ratio



  • Polynomial approximation of the price-dividend ratio



  • Piecewise-linear approximation of the price-dividend ratio



  • Polynomial versus piecewise approximation: motivational example



  • Homework 3



  • Homework 3 answer key
Classes 13–14
International Asset Pricing with Recursive Preferences


Feb. 25 & Mar. 2



  • International Risk Sharing Is Better Than You Think, or Exchange Rates Are Too Smooth — Michael Brandt, John Cochrane, and Pedro Santa-Clara, Journal of Monetary Economics (2006)



  • Risks for the Long Run and the Real Exchange Rate — Riccardo Colacito and Mariano M. Croce, Journal of Political Economy (2011)



  • International macro-finance and long-run risks