BA Modern Language and Business & Management (Portuguese)

Year of entry: 2022

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

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. 

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

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

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

Online Learning and Guided Self-Study

Employability skills

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.

Assessment methods

80%      Exam

20%      Mid-term test

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

Independent study hours
Independent study 0

Teaching staff

Staff member Role
Leonidas Koutsougeras Unit coordinator

Additional notes

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

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