37264 - Economics of Financial Markets

Learning outcomes

The aim of the class is to introduce the students to the basic theory of competitive financial markets. It starts introducing the basic concept of modern finance, i.e., the absence of arbitrage opportunities, and its implications for asset pricing. Building on this, it discusses choice under uncertainty and risk aversion, the basic portfolio choice model and models of equilibrium prices and allocations, including the canonical mean – variance model and A.P.T.

Course contents

1 Introduction to equilibrium and arbitrage

2 Introduction to valuation

3 Expected utility and risk

4 Optimal portfolio

5 Equilibrium prices and allocations

6 Mean-Variance models

7 APT

Course prerequisites :
Mathematics:
− Basic linear algebra,
− Point to set topology in Rn,
− Calculus of several variables and vector valued maps,
− Implicit function theorem,
− Optimization under linear constraints, 

- Basic probability theory

If you are not that confident in your math proficiency, you may find convenient to attend the crash course in math, offered in September.
Economics:
Knowledge of microeconomics at the intermediate level (i.e., at the level of, say, H. Varian, Microeconomics, Norton) is taken for granted.
Please, take very seriously the prerequisites above. This is an intensive class. You will hardly have the time to make up for your lack of background knowledge once classes start. 

Readings/Bibliography

LeRoy, S., and J. Werner, Principles of Financial Economics, Cambridge University Press, 2001

Huang, C.-F., R.H. Litzenberger, Foundations for Financial Economics, North Holland, 1988

The slides of the classes are available on my web page.

Teaching methods

Lectures

Assessment methods

The final exam on this part of the course is a three hours written exam. I preserve my right to require an additional oral exam in special circumstances. The exam aims to verify the student's understanding of the key analytical results and tools discussed in class. This can be obtained requiring him/her to apply these tools to simple computational problems, to explain properly the logic and the proofs of some of these results, and to apply their basic logic to novel economic problems.
 

Links to further information

http://www2.dse.unibo.it/pietra/

Office hours

See the website of Tito Pietra