An introduction to Financial Economics
This is a course on financial economics that I teach second--year
Masters and Ph.D. students at IGIDR,
Bombay.
Books
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
Course content
- 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
- Microstructure
Markets: microstructure [Slideshow]
- What makes microstructure?
- Trading
- Clearing and settlement
- Example 1: microstructure at NSE
- Example 2: microstructure at a jaggery futures market
Selecting an optimal portfolio: mean-variance
theory [Slideshow]
- Defining a portfolio
- Assumptions about asset returns and risk
- Special case of capital allocation
- What is leverage?
- Optimisation
- 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.
Mechanics
- Susan Thomas can be reached at susant@igidr.ac.in. 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.
Useful material
Useful links
Back up to Susan Thomas' teaching page
Susan Thomas,
IGIDR, Bombay
susant@igidr.ac.in