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School of Social Sciences

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BAEcon Economics
Learn how the social sciences can help you to understand today's world.

BAEcon Economics

Year of entry: 2018

Course unit details:
Financial Economics

Unit code ECON30432
Credit rating 10
Unit level Level 3
Teaching period(s) Semester 2
Offered by Economics
Available as a free choice unit? Yes

Overview

See course Blackboard pages.

Pre/co-requisites

Unit title Unit code Requirement type Description
Mathematical Economics I ECON20120 Pre-Requisite Compulsory
ECON30432 pre-req: ECON20120

Aims

The overarching aim of the course is to enable students to understand the interface between economics and finance. To this end the course aims:

  • To familiarize students with the role of uncertainty and risk in economics and finance.
  • To enable students to understand the economic role of (different types of) assets.
  • To introduce students to the fundamental concepts of asset markets (short selling, arbitrage, equilibrium, optimality, completeness of asset markets).
  • To familiarize students with the economic fundamentals of formal theories of asset pricing, their implications and limitations.

Emphasis throughout will be on the formal theory of asset markets. There is no applied material involved.

Learning outcomes

On completion of this unit successful students will be able to:

  1. Have clear understanding of the economic principles underlying finance.
  2. Demonstrate an understanding of the role of asset markets as means of risk diversification.
  3. Demonstrate an understanding of the foundations and limitations of asset pricing techniques.
  4. Solve numerically typical problems related to asset pricing and risk management.
  5. Perform rigorous analysis of asset markets and portfolio decisions.

Syllabus

Uncertainty and Risk:

  • States of nature.
  • Contingencies (events).
  • Information.
  • Contingent goods, contingent plans.
  • Preferences over contingent plans.
  • Alternative notions of risk.

 

Alternative Institutional Contexts of Risk Sharing:

  • Contingent markets.
  • Security markets.
  • Real/financial securities, bonds, stocks, options, derivative securities.

 

 Individual Behaviour Under Uncertainty:

  • The no arbitrage principle.

 

Economies with Uncertainty:

  • Contingent markets equilibrium.
  • Asset markets equilibrium, the no arbitrage property of asset prices.
  • Asset market completeness, equivalence between asset markets and contingent markets, optimality properties of complete asset structures and policy implications.
  • Asset pricing techniques: arbitrage pricing theory, the capital asset pricing model.
  • The Modigliani-Miller theorem of corporate finance.
  • Incomplete asset markets, causes and consequences.
  • Information, (rational) expectations.

Teaching and learning methods

Lectures and exercise classes.

Employability skills

Analytical skills
Synthesis and analysis of data and information. Critical reflection and evaluation. Performing rigorous analysis of financial markets and decisions.
Problem solving
Research
Planning, conducting and reporting on research.
Other
Mapping and modelling. Decision-making in financial markets.

Assessment methods

Method Weight
Other 20%
Written exam 80%
  • Mid-Term Exam - online exam (20%).
  • Final Exam - section A: 3-4 questions, section B: one of two longer questions (80%).

Feedback methods

  • Tutorial exercises.
  • Three online homework sets.
  • Office hours.
  • Revision sessions.
  • Discussion boards.

Recommended reading

Theory of Incomplete Markets, M. Magill and M. Quinzii, MIT Press, Chapter 1.

Study hours

Scheduled activity hours
Assessment written exam 1.5
Lectures 22
Practical classes & workshops 5
Independent study hours
Independent study 71.5

Teaching staff

Staff member Role
Leonidas Koutsougeras Unit coordinator

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