FINANCIAL ECONOMICS

Financial Economics is one of the core educational courses of the program and it is meant to provide the students with the basic knowledge of financial economics.

Students gain general knowledge about financial economics. Starting from foundation concepts of decision theory, the course goes through the standard theory of decisions under uncertainty; then it introduces financial markets and discusses arbitrage theory. The central part of the course is the study of static portfolio choices, with particular reference to the “Markowitz Mean-Variance Portfolio Theory”. In the end, we propose an introduction to the pricing of derivates.

Basic knowledge of microeconomics, probabilities and calculus as acquired in the first three semesters of the course

Introduction to Financial Markets
– Functions and structure of financial markets;
– Efficient market hypothesis and rational expectations;
– Asset market microstructure;
– Behavioral finance


Decisions under Risk
– Utility Maximization under Risk;
– Von Neumann-Morgenstern expected utility theory;
– Risk Aversion

Arbitrage Theory
– Arbitrage;
– Complete markets and the “First Fundamental Theorem of Finance”;
– Incomplete markets and the “Second Fundamental Theorem of Finance”.

Static Portfolio Choices
– Portfolio choices;
– Markowitz Mean-Variance Portfolio Theory;

Pricing of Derivatives
– An introduction to the Black-Scholes-Merton model.

The course material will be presented in class. Some other useful books are:

- Investments, Zvi Bodie Alex Kane Alan J. Marcus , 10th Edition. [BKM]
- The Economics of Financial Markets, Roy E. Bailey, Cambridge University Press, 2005. [B]
- Microfoundations of Financial Economics, Yvan Lengwiler, Princeton University Press, 2004. [L]
- The Economics of Money, Banking, and Financial Markets, Frederick S. Mishkin, Kent Matthews, Massimo Giuliodori 10th edition. [MMG]

A detailed description of the chapters and pages will be given in class and written in the syllabus.

The final test is a written exam lasting 90 minutes based on the exercises discussed together in class.

The teaching method consists of (i) lectures, (ii) weekly exercises, (iii) group work to elaborate the material to go into the essays.

Course material can be found on the moodle platform.

English

written