FINANCIAL ECONOMICS

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

Students gain general knowledge about financial economics. After an introduction to the characteristics and functioning of financial markets, the major financial economics models are analyzed. Starting from the standard theory of decisions under uncertainty, we formulate simple economic models with financial markets to determine the value of interest rates and stochastic discount factor in equilibrium. The central part of the course is the study of static portfolio choices, with particular reference to the Mean-Variance Portfolio Theory of Markowitz. The deals also with arbitrage theory an to its application to the pricing of financial derivates.

Fundamental 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
- Stock market indexes

Decisions under risk
- Utility maximization under risk
- Von Neumann-Morgenstern expected utility theory
- Risk aversion

Equilibrium in financial economies
- Interest rates and intertemporal preferences
- Stochastic discount factor and risk preferences

Static Portfolio Choices
- Portfolio choices with one risky and one risk-less asset
- Markowitz Mean-Variance Portfolio Theory

Arbitrage Theory
- Arbitrage
- Complete and incomplete markets
- The fundamental theorem of financial evaluation
- An introduction to the pricing of derivates

The course material is composed of lecture notes and selected chapters from

- Investments, Zvi Bodie Alex Kane Alan J. Marcus , 10th Edition. [BKM]
- The Economics of Financial Markets, Roy E. Bailey, Cambridge University Press, 2005. [B]

Other useful textbooks are

- 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]

The final test is a written exam based on the exercises and theoreticla questions on the content of the course. Exercises are similar to the one solved together every week in class.

The teaching method consists of (i) lectures, (ii) weekly exercises, (iii) individual work.

Course material can be found on the moodle platform.

English

written