Financial Economics

Code:

LEC521

Acronym:

FEC

Keywords
Classification	Keyword
OFICIAL	Economics

Instance: 2006/2007 - 2S

Active?	Yes
Responsible unit:	Grupo de Economia
Course/CS Responsible:	ECONOMICS

Cycles of Study/Courses

Acronym	No. of Students	Study Plan	Curricular Years	Credits UCN	Credits ECTS	Contact hours	Total Time
ECO	46	Official Curricular Structure since 2004	4	3	6	-
GES	15	Official Curricular Structure since 2004	4	3	6	-

Objectives

The course presents the main theoretical principles in Financial Economics. The purpose of the course is twofold. First, it aims at preparing students who want to pursue an academic career in Economics or Finance. The second objective is to give a good preparation to students who wish to work in financial markets and institutions. The first part of the course explores the idea of arbitrage both in a world with certainty and uncertainty. Arbitrage pricing is approached at a general level, but the course also contains particular applications to bonds, stocks and derivative markets. The second part of the course concentrates on equilibrium models of asset pricing. The concept of complete versus incomplete markets is also explored as the link between both parts of the course.

Program

1. Introduction
1.1 Introduction
1.2 Basic concepts
1.3 Financial intermediation
1.4 Financial markets
1.5 Analytical concepts

2. Arbitrage and Valuation
2.1 Arbitrage
2.2 Arrow-Debreu securities and the fundamental equation of valuation
2.3 Applications
2.3.1 Bonds and stocks
2.3.2 Derivatives
2.3.3 Modigliani-Miller Theorem

3. Preferences and Equilibrium
3.1 Preferences and uncertainty
3.2 Valuation of assets in equilibrium
3.2.1 Consumption CAPM
3.2.2 Capital Asset Pricing Model (CAPM)

4. Topics
4.1 Market microstructure
4.2 Corporate finance
4.3 Banking

Main Bibliography

Barucci, Emilio 2002. “Financial Markets Theory: Equilibrium, Efficiency and Information” Springer-Verlag.

Bernstein, Peter L. 1992. “Capital Ideas: the Improbable Origins of Modern Wall Street” The Free Press, New York.

Brealey, R and S. Myers 2002. “Principles of Corporate Finance” 7th ed, McGraw Hill, New York.

Cecchetti, Stephen G., 2006. “Money, Banking and Financial Markets” McGraw Hill, New York.

Copeland, T and F. Weston 1988.“Financial Theory and Corporate Policy” Addison-Wesley; Massachusetts.

Cuthbertson, K. and Dirk Nitzsche 2004. “Quantitative Financial Economics: Stocks, Bonds and Foreign Exchange” 2nd ed, John Wiley and Sons.

Danthine, Jean-Pierre and John B. Donaldson 2005. “Intermediate Financial Theory” 2nd ed, Academic Press Inc, London.

Elton, Edwin J., Martin J. Gruber, Stephen J. Brown, William N Goetzmann 2002. “Modern Portfolio Theory and Investment Analysis” 6th ed, John Wiley and Sons.

Freixas, X. and Jean-Charles Rochet 1997 “Microeconomics of Banking” MIT Press, Cambridge Massachusetts.

Greenbaum S. and Anjan Thakor 1994 “Contemporary Finance Intermediation” Wadsworth.

Huang C. and R. Litzenberger 1988. “Foundations for Financial Economics” Prentice-Hall, Englewood Cliffs.

Ingersoll, J. 1987 “Theory of Financial Decision Making” Rowan & Littlefield.

Malkiel, Burton G. 2003. “A Random Walk Down Wall Street: The Time-tested Strategy for Successful Investing” W. W. Norton & Company, New York.

O’Hara, M. 1995. “Market Microstructure Theory”. Blackwell Publishers, Cambridge, Massachusetts.

Obstfeld, M. and Kenneth Rogoff 1996. “Foundations of International Macroeconomics” MIT Press, Cambridge Massachusetts.

Teaching methods and learning activities

Theory and exercises are presented in class. Students must solve problem sets at home.

Evaluation Type

Distributed evaluation without final exam

Eligibility for exams

Students who choose the “continuous evaluation” method must attend, at least, 75% of the classes.

Calculation formula of final grade

1) Two tests (with weight of 30% each).
2) Problem sets (20%).
3) Participation in class work (20%).

Classification improvement

As in “Regime de Avaliação de Conhecimentos”.