Financial Economics

ECON30432 Financial Economics 10 Semester 2 Undergraduate Level 3 Leonidas Koutsougeras Unit coordinator 1 FHEQ level (Framework for Higher Education Qualifications) ' Last part of a Bachelors ' European Credit Transfer & Accumulation System Rating : 5.0 The overarching aim of the course is to enable students to understand the interface between economics and finance. To this end the course aims:<ul> <li>To familiarize students with the role of uncertainty and risk in economics and finance.</li> <li>To enable students to understand the economic role of (different types of) assets.</li> <li>To introduce students to the fundamental concepts of asset markets (short selling, arbitrage, equilibrium, optimality, completeness of asset markets).</li> <li>To familiarize students with the economic fundamentals of formal theories of asset pricing, their implications and limitations.</li></ul>Emphasis throughout will be on the formal theory of asset markets. There is no applied material involved.On completion of this unit successful students will be able to:<ul> <li>Have clear understanding of the economic principles underlying finance.</li> <li>Demonstrate an understanding of the role of asset markets as means of risk diversification.</li> <li>Demonstrate an understanding of the foundations and limitations of asset pricing techniques.</li> <li>Solve numerically typical problems related to asset pricing and risk management.</li> <li>Perform rigorous analysis of asset markets and portfolio decisions</li></ul> Starting with the fundamental complications introduced by the presence of uncertainty in decision making, the course explores the role of assets as means for risk hedging.The course proceeds to study the individual choice of optimal portfolios or bundles of contracts. Some fundamental principles of finance emerge from this study as necessary conditions of optimal risk diversification.These conclusions are embedded into an economy where individual portfolio decisions interact to give rise to an equilibrium determination of asset prices and risk sharing.In this context the role of asset markets in the distribution of resources in the economy as a whole becomes transparent. The study draws conclusions regarding the relevance of financial institutions in the determination of resource distribution, its optimality properties and the ensuing policy implications. The overarching aim of the course is to enable students to understand the interface between economics and finance. To this end the course aims:<ul> <li>To familiarize students with the role of uncertainty and risk in economics and finance.</li> <li>To enable students to understand the economic role of (different types of) assets.</li> <li>To introduce students to the fundamental concepts of asset markets (short selling, arbitrage, equilibrium, optimality, completeness of asset markets).</li> <li>To familiarize students with the economic fundamentals of formal theories of asset pricing, their implications and limitations.</li></ul>Emphasis throughout will be on the formal theory of asset markets. There is no applied material involved. On completion of this unit successful students will be able to:<ol> <li>Have clear understanding of the economic principles underlying finance.</li> <li>Demonstrate an understanding of the role of asset markets as means of risk diversification.</li> <li>Demonstrate an understanding of the foundations and limitations of asset pricing techniques.</li> <li>Solve numerically typical problems related to asset pricing and risk management.</li> <li>Perform rigorous analysis of asset markets and portfolio decisions.</li></ol> Analytical skills Synthesis and analysis of data and information. Critical reflection and evaluation. Performing rigorous analysis of financial markets and decisions. Prediction of financial markets trends. Problem solving Application of asset pricing techniques. Decision-making in financial markets. Research Planning, conducting and reporting on research in financial markets. Other Mapping and modelling. Inform financial markets policy making. ProvisionalUncertainty and Risk:<ul><li>States of nature.</li><li>Contingencies (events).</li><li>Information.</li><li>Contingent goods, contingent plans.</li><li>Preferences over contingent plans.</li><li>Alternative notions of risk.</li></ul>Alternative Institutional Contexts of Risk Sharing:<ul><li>Contingent markets.</li><li>Security markets.</li><li>Real/financial securities, bonds, stocks, options, derivative securities.</li></ul>Individual Behaviour Under Uncertainty:<ul><li>The no arbitrage principle.</li></ul>Economies with Uncertainty:<ul><li>Contingent markets equilibrium.</li><li>Asset markets equilibrium, the no arbitrage property of asset prices.</li><li>Asset market completeness, equivalence between asset markets and contingent markets, optimality properties of complete asset structures and policy implications.</li><li>Asset pricing techniques: arbitrage pricing theory, the capital asset pricing model.</li><li>The Modigliani-Miller theorem of corporate finance.</li><li>Incomplete asset markets, causes and consequences.</li><li>Information, (rational) expectations.</li></ul> Synchronous activities (such as Lectures or Review and Q&A sessions, and tutorials), and guided self-study 0 Other 100% <div> 80%      Exam20%      Mid-term test</div> <ul> <li>Tutorial exercises.</li> <li>Three online homework sets.</li> <li> Office hours.</li> <li>Revision sessions.</li> <li>Discussion boards.</li></ul> ECON20120 Mathematical Economics I Pre-Requisite Compulsory ECON20120 Y Theory of Incomplete Markets, M. Magill and M. Quinzii, MIT Press, Chapter 1. 0 0 0 For every 10 course unit credits we expect students to work for around 100 hours. This time generally includes any contact times (online or face to face, recorded and live), but also independent study, work for coursework, and group work. This amount is only a guidance and individual study time will vary