An introduction to Financial Economics
This is a course on financial economics that I teach second--year
Masters and Ph.D. students at IGIDR,
There is no one textbook used for this class. Rather, there is a
list that will be built up during the course of this class. These include:
- A useful core textbook is Investment science by David Luenberger.
The following are highly recommended general reading:
- The Economics of Financial Markets by Houthakker and
Williamson (for market microstructure).
- A random walk down Wall Street by Burton G. Malkiel.
- Capital Ideas by Peter Bernstein.
- India's financial markets: an insider's guide to how the
markets work by Ajay Shah, Susan Thomas, Michael Gorham
- The role of a financial asset in smoothing consumption
- Defining a financial asset
- Different asset classes by cashflow and maturity characteristics
- Approaches to pricing financial assets
- Who uses finance? Individuals, firms, government
An introduction to firms [Slideshow]
- How is a firm different from an individual?
- Types of firms
- Placing debt and equity in firm finances
- Debt vs. Equity
- Measurement of debt vs. equity - from the firm's balance sheet
Some basic tools in analytical finance [Slideshow]
- Measuring returns
- Pricing using discounted present value
- Pricing bonds
- Pricing equity
Efficient Market Hypothesis [Slideshow]
- Understanding prices and returns
- Overview of EMH
- Statistical tests of EMH: tests of randomness
- Tests of martingale prices: Serial correlations and variance ratios
Markets: institutions vs. outcomes [Slideshow]
- Functions of markets
- Price discovery
- Liquidity provision
- Risk management
Markets: microstructure [Slideshow]
- What makes microstructure?
- Clearing and settlement
- Example 1: microstructure at NSE
- Example 2: microstructure at a jaggery futures market
Selecting an optimal portfolio: mean-variance
- Defining a portfolio
- Assumptions about asset returns and risk
- Special case of capital allocation
- What is leverage?
- A simulation
Portfolio optimisation, the Markowitz approach [Slideshow]
- The efficient portfolio frontier
- Two fund separation
- With the risk-free asset: the capital allocation line
- One fund separation
- A simulation
- The implementation problem
- From portfolio optimisation to pricing risk
Asset pricing, the Capital Asset Pricing Model [Slideshow]
- Calculating E(r_i) using the market factor
- The Capital Asset Pricing Model, CAPM
- Beta for a portfolio
- Operationalising the Markowitz solution using the CAPM beta
- Estimating beta
- Using CAPM to calculate the discount factor.
- Susan Thomas can be reached at email@example.com. Office
extension is 550.
- Students are expected to read the following newspapers the Mint,
Financial Express, Economic Times, Business Standard. One student
will be asked to make a 5-minute presentation on both Tuesday and
Thursday on an important issue in Indian finance for the week.
Back up to Susan Thomas' teaching page