ECON 527 | Course Introduction and Application Information

Course Name
Financial Economics
Code
Semester
Theory
(hour/week)
Application/Lab
(hour/week)
Local Credits
ECTS
ECON 527
Fall/Spring
3
0
3
7.5

Prerequisites
None
Course Language
English
Course Type
Elective
Course Level
Second Cycle
Course Coordinator -
Course Lecturer(s)
Assistant(s) -
Course Objectives The aim of this course is to introduce students to some basic concepts in financial economics and to establish its roots in micro and macroeconomics and general equilibrium theory. The main objective is to introduce key concepts and theories in economics that are useful in understanding about and guiding decisionmakers in financial markets.
Course Description The students who succeeded in this course;
  • will be able to explain contemporary theories of asset pricing and decision-making under uncertainty.
  • will be able to construct a multi-agent, multi-period general equilibrium model of an asset economy.
  • will be able to list the properties of different utility functions used in financial economics.
  • will be able to compute asset prices in financial economics.
  • will be able to make a critique of seminal and contemperary research in financial economics.
Course Content This course takes the student from the level of microeconomics principles to current theories and topics in financial economics. The course will survey and introduce assetpricing models.. ArrowDebreu and Radner general equilibirium theories are developed and combined with NeumannMorgenstern utility theory. Both static and dynamic models are explored. Asset pricing models with and without arbitrage opportunities are discussed. Asset prcing puzzles are investigated. ModiglianiMiller arguments on capital structure are introduced. Binomial option pricing model is developed.

 



Course Category

Core Courses
Major Area Courses
Supportive Courses
Media and Management Skills Courses
Transferable Skill Courses

 

WEEKLY SUBJECTS AND RELATED PREPARATION STUDIES

Week Subjects Related Preparation
1 Introduction
2 Single Period Consumption, Portfolio Choice, and Asset Pricing LeRoy and Werner; Chapters 8, 9, and 10.*Machina, M. J. 1987. “Choice Under Uncertainty: Problems Solved and Unsolved.” Journalof Economic Perspectives 1:12154.MasColell, Whinston, and Green; Chapter 6.Pratt, J. W. 1964. “Risk Aversion in the Small and in the Large.” Econometrica 32:12236.*Pennacchi; Chapter 1.*Rabin, M. 2000. “Risk Aversion and ExpectedUtility Theory: A Calibration Theorem.”Econometrica 68:128192.
3 Consumption Savings and Asset Pricing Lintner, J. 1965. “The Valuation of Risky Assets and the Selection of Risky Investments inStock Portfolios and Capital Budgets.” Review of Economics and Statistics 47:1337.*Pennacchi; Chapter 3.Mossin, J. 1966. “Equilibrium in a Capital Asset Market.” Econometrica 34:76883.Roll, R. 1977. "A Critique of the Asset Pricing Theory's Tests Part I: On Past and PotentialTestability of the Theory." Journal of Financial Economics 4:12976.Ross, S. A. 1976. “The Arbitrage Theory of Capital Asset Pricing.” Journal of EconomicTheory 13:34160.Sharpe, W. F. 1964. “Capital Asset Prices: A Theory of Market Equilibrium under Conditionsof Risk.” Journal of Finance 19:42542.
4 Multi Period Discrete Time Models of Consumption and Portfolio Choice *Hall, R. E. 1978. "Stochastic Implications of the Life CyclePermanent Income Hypothesis:Theory and Evidence." Journal of Political Economy 86:97187.
5 MultiPeriod Market Equilibrium *Cochrane, J. H. 1991. "A Simple Test of Consumption Insurance." Journal of PoliticalEconomy 99:957976.*Cochrane; Chapters 10 and 11.Hansen, L. P., and K. J. Singleton. 1982. "Generalized Instrumental Variables Estimation ofNonlinear Rational Expectations Models." Econometrica 50:126988.. 1984. "Errata." Econometrica 52:26768.Lucas, R. E. 1978. "Asset Prices in an Exchange Economy." Econometrica 46:142946.*Mace, B. J. 1991. "Full Insurance in the Presence of Aggregate Uncertainty." Journal ofPolitical Economy 99:92856.*Pennacchi; Chapter 6.Townsend, R. M. 1995. “Consumption Insurance: An Evaluation of RiskBearing Systems inLowIncome Economies.” Journal of Economic Perspectives 9:83102.
6 Basics of Derivative Pricing – Binomial Model
7 Dynamic Hedging
8 Continuous Time Consumption and Portfolio Choice
9 Asset Pricing in Continuous Time
10 Behavioral Finance and Asset Pricing Barberis, N., M. Huang, and T. Santos. 2001. "Prospect Theory and Asset Prices." QuarterlyJournal of Economics 116:153.*Barberis, N., and R. Thaler. 2003. "A Survey of Behavioral Finance." In Constantinides, G.,M. Harris, and R. Stulz, Handbook of Behavioral Finance, Volume 1B, Chapter 18, pp.10531123. New York: Elsevier North Holland.Kahneman, D., and R. H. Thaler. 2006. “Utility Maximization and Experienced Utility.” Journalof Economic Perspectives 20(Winter):221–34.*Lo, A. W. 2004. “The Adaptive Market Hypothesis.” Journal of Portfolio Management 30(Anniversary Issue):1529.Kogan, L., S. Ross, J. Wang, and M. Westerfield. 2006. “The Price Impact and Survival ofIrrational Traders.” Journal of Finance 61:195229.Pennacchi; Chapter 15.Thaler, R., and S. Benartzi. 2004. “Save More Tomorrow: Using Behavioral Economics toIncrease Employee Saving.” Journal of Political Economy 112:S165S189.
11 Valuation Under Asymmetric Information
12 Asymmetric Information, Trading, and Markets
13 Models of the Term Structure of Interest Rates Duffie, D., and K. J. Singleton. 1999. "Modeling Term Structures of Defaultable Bonds."Review of Financial Studies 12:687720.Merton, R. C. 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates."Journal of Finance 29:44970.
14 Models of Credit Risk
15 Final Exam
16 Review of the Semester  

 

Course Notes/Textbooks Lengwiler, Yvan, Microfoundations of Financial Economics, Princeton University Press, 2006.
Suggested Readings/Materials Fabozzi, F., Neave, E. and Zhou, G., Financial Economics, Wiley, 2012.

 

EVALUATION SYSTEM

Semester Activities Number Weigthing
Participation
16
Laboratory / Application
Field Work
Quizzes / Studio Critiques
Homework / Assignments
Presentation / Jury
Project
1
20
Seminar / Workshop
Oral Exams
Midterm
1
40
Final Exam
1
40
Total

Weighting of Semester Activities on the Final Grade
70
Weighting of End-of-Semester Activities on the Final Grade
30
Total

ECTS / WORKLOAD TABLE

Semester Activities Number Duration (Hours) Workload
Theoretical Course Hours
(Including exam week: 16 x total hours)
16
3
48
Laboratory / Application Hours
(Including exam week: 16 x total hours)
16
Study Hours Out of Class
16
3
Field Work
Quizzes / Studio Critiques
Homework / Assignments
Presentation / Jury
Project
1
30
Seminar / Workshop
Oral Exam
Midterms
1
40
Final Exam
1
40
    Total
206

 

COURSE LEARNING OUTCOMES AND PROGRAM QUALIFICATIONS RELATIONSHIP

#
Program Competencies/Outcomes
* Contribution Level
1
2
3
4
5
1

To be able to demonstrate general business knowledge and skills.

2

To able to master the state-of-the-art literature in the area of specialization.

3

To be able to evaluate the performance of business organizations through a holistic approach.

4

To be able to effectively communicate scientific ideas and research results to diverse audiences.

5

To be able to deliver creative and innovative solutions to business-related problems.

6

To be able to solve business related problems using analytical and technological tools and techniques.

7

To be able to take a critical perspective in evaluating business knowledge.

8

 

To be able to exhibit an ethical and socially responsible behavior in conducting research and making business decisions.

9

To be able to carry out a well-designed independent and empirical research.

10

To be able to use a foreign language to follow information about the field of finance and participate in discussions in academic environments.        

*1 Lowest, 2 Low, 3 Average, 4 High, 5 Highest