Note: This is a preliminary draft of the syllabus. At the beginning of the semester, I will hand out and post the definitive version which will be much more detailed than this and will spell out all of my policies (including the assessment method)



Note: Knowledge of the following topics is indispensable and will be assumed: intermediate microeconomics, basic finance, calculus I and calculus II. NOTE: I will be using also basic linear algebra throughout the course (e.g., matrix algebra, basic properties of vector spaces, inner product, vector subspaces and linear span of a subset of vectors, the concept of linear independence etc.). The linear algebra-related tools that are needed will be explained as carefully as possible. However, some basic knowledge of linear algebra is very helpful.

Financial economics lies at the intersection of Finance and Economics. This is an advanced undergraduate course that employs mathematical methods and tools. Nowadays, Financial Economics plays an increasingly important role in the training of economists. This is largely due to the transformation in capital markets that has occurred in recent years, and to the rapid development of the field itself. In fact, Financial economics is gradually taking center stage in the economic analysis of issues that involve time and uncertainty. 



A sample of topics to be covered is as follows: Equilibrium in security markets (competitive equilibrium under uncertainty, sequential trading and rational expectations); arbitrage, state prices and valuation; the fundamental theorem of finance; valuation under portfolio restrictions; preferences under risk and ambiguity; risk and risk aversion; optimal portfolios; equilibrium prices in security markets (consumption-based security pricing); Pareto-optimal allocation of risk; effectively complete security markets; mean-variance analysis; CAPM.

First of all, the objective of this course is that students develop analytical skills and learn to work with formal economic models. Students will develop the ability to model financial markets using mathematics. Students will get acquainted with an overview of the theory of financial markets from an economic perspective. The major conceptual tool students will learn is the notion of economic equilibrium.

·       Understanding the role of financial markets in hedging and insuring participants against risk.

·       Understanding the efficiency properties of financial markets, and the perverse equilibrium effects that less-than-perfect financial markets can have, with consequences for asset pricing.

Referring to the learning outcomes (LOS) for the Economics and Finance major (that are posted online), by taking this course students will:



LOS 1: Build a solid understanding of and knowledge base in microeconomics and financial economics.



LOS 2: Develop critical-thinking skills and learn to apply microeconomic analysis to understand economic events and everyday problems.



LOS 5: Develop adequate training in mathematical methods to develop problem-solving skills, perform proofs, carry out formal analysis, and prepare for further graduate studies in the areas of economics and finance.



LOS 6: Master solid communication skills that enable them to formulate a well-organized argument and communicate effectively in written and graphical form about specific financial issues.

Given the nature of the subject matter (fascinating but fairly challenging and technical), the aim and scope of the course, and since the lectures will hinge upon fairly advanced material, students are required to attend: ATTENDANCE IS MANDATORY. If you are not committed to attending all lectures and working hard, you should not enroll in this class. If you really have to miss a class, please let me know beforehand. If you have a very good reason for skipping a class, I will not penalize you. Just speak with me. I will be as flexible as possible in accommodating your request and meeting your needs.

EXAMS AND POLICY ON ABSENCES: At the beginning of the semester I will circulate the final draft of the syllabus with the exact exam dates. In general, there are NO make-up for missed midterm exams (the exam dates will be scheduled well ahead of time). If, for any compelling reason, you happen to miss a midterm exam, I want you to notify me ahead of time (if possible) and I will ask you to provide me with a formal justification for the absence. You have to prove your claim about the cause of your absence. If I deem the justification is formal, legitimate and merits consideration, then I would let you take a make-up exam. Note: regarding the final exam, there are specific policies put in place by JCU, and I shall comply with them.