Financial Economics 2600-MFBRdz1EF
LECTURE
- Financial economics: basic concepts.
- Financial market equilibrium (securities market, agent theory, consumption and portfolio choice, priority conditions, general equilibrium, existence and invariance of equilibrium, representative agent models).
- Basic models and tests in financial markets.
- Prediction of stock returns.
- Linear pricing and the performance of returns, linear equilibrium, pricing in regulated markets, optimization problems.
- Arbitrage and strong arbitrage, diagram representation, cost function, arbitrage and optimal portfolios, equilibrium pricing.
- Portfolio constraints (short-sale constraints, portfolio selection under short-sale constraints, the law of one price, bounded and unbounded arbitrage, equilibrium rates).
- Volatility and equilibrium theory, pricing and risk neutrality, volatility and portfolio constraints.
- Risk and expected utility, Von Neumann-Morgenstern theory, utility axioms under state control, expected utility axioms.
- Risk aversion vs. risk neutrality, Arrow-Pratt measures of risk aversion, risk compensation, Pratt theory, risk aversion.
- Optimal portfolios (portfolio choice and wealth, optimal portfolios with a single risk, risk premium and optimal portfolios, optimal portfolios when the risk premium is low).
- Comparative statistics of optimal portfolios (wealth, unexpected returns, risk).
- Optimal portfolios considering multiple risks (return on risk, optimal portfolios under fair pricing, risk premium and optimal portfolios, optimal portfolios under linear risk tolerance).
- Equilibrium price and allocation (equilibrium returns, expected equilibrium returns, volatility of marginal returns).
- Competitive markets and Pareto equilibrium of risk allocation.
- Variance analysis.
- Factor pricing (pricing errors, average structure pricing).
- Long-term forward markets (disequilibrium in long-term financial markets, disequilibrium and information, asset scope, first condition of equilibrium, arbitrage, dynamic markets, event analysis, Pareto equilibrium)
- Rational bubbles and learning.
- Behavioral finance and market anomalies.
- Models of market behavior.
- EMH testing theory.
- Affine and SDF (Stochastic Discount Factor) models.
- Testing CIP, UIP, and FRU.
- Investments vs. bankruptcy theory.
- ESG as a new risk factor.
CLASSES
- Financial economics: basic concepts.
- Modeling financial markets (normality tests, random walk, cointegration, Monte Carlo simulation).
- Testing EMH (Efficient Market Hypothesis).
- Stock price predictions using residual tests, ECM (Error Correction Model), non-linear models, and Markov models.
- Constructing equilibrium under linear pricing conditions.
- Risk modeling in investment decision-making.
- Risk aversion.
- Optimal portfolios.
- Comparative statistics of optimal portfolios.
- Optimal portfolios considering multiple risks.
- Equilibrium price and allocation.
- Competitive markets and Pareto equilibrium of risk allocation.
- Variance analysis.
- Factor pricing.
- Long-term forward markets.
- Models of market behavior.
- Probability modeling.
- EMH testing theory.
- Affine and SDF models.
- Testing CIP, UIP, and FRU.
- Bankruptcy risk modeling.
Type of course
Learning outcomes
- K_W01: In-depth knowledge of research methodology and terminology within the discipline of economics and finance, as well as complementary disciplines (management and quality sciences, legal sciences).
- K_W02: In-depth knowledge of principles, procedures, and practices regarding investment advisory and capital markets.
- K_W05: Understanding complex technological, social, political, legal, economic, and ecological processes and phenomena, including fundamental dilemmas of modern civilization and their impact on financial decisions in organizations, the functioning of the entire economy, and organizations in the scope of information systems development.
- K_U01: Ability to utilize the theory of economics, finance, and complementary disciplines (management and quality sciences, legal sciences) to recognize, diagnose, and solve problems related to financial decisions in investment advisory and capital markets.
- K_U02: Ability to correctly interpret complex technological, social, political, legal, economic, and ecological processes and phenomena, and to evaluate their impact on financial decisions in organizations, the functioning of organizations, and the economy as a whole.
- K_K01: Ability to evaluate and apply a critical approach to complex situations and phenomena related to investment advisory and capital markets within an organization.
Assessment criteria
Lecture: Written exam (test, open questions, problem-solving tasks).
Classes: Continuous assessment (ongoing class preparation and active participation), mid-semester written control tests, attendance control, term project. Submitting the project is a mandatory prerequisite to pass the classes.
Learning outcomes will be verified on an ongoing basis through tasks performed by participants during classes, and finally through the class pass test and the final exam.
Lecture Grading Components:
- Written exam (100% of the base lecture grade)
- An excellent grade (bardzo dobra) from the practical classes adds 20% to the lecture score.
- Additional points for active participation up to 10%.
Classes Grading Components:
- 10% Class performance/participation
- 70% Group project
- 20% Final test (kolokwium)
Course Passing (Exam):
- Written exam – on-site (100% of the grade) consisting of open-ended, tabular, and multiple-choice questions. Only students who have passed the classes are allowed to take the exam. Minimum passing score on the exam is 51%.
A total of 30 points can be earned during the exam, which determine the final grade:
- 0-50% of points – grade 2 (fail)
- 51%-60% of points – grade 3
- 61%-70% of points – grade 3.5
- 71%-80% of points – grade 4
- 81%-90% of points – grade 4.5
- 91%-100% of points – grade 5
Classes Passing:
A total of 100 points can be earned during classes (10% participation, 70% group project, 20% final test), which determine the class grade:
- 0-50 points – grade 2 (fail)
- 51-60 points – grade 3
- 61-70 points – grade 3.5
- 71-80 points – grade 4
- 81-90 points – grade 4.5
- 91-100 points – grade 5
Bibliography
Patrycja Chodnicka-Jaworska, Piotr Jaworski, Wrażliwość rynku akcji na publikacje danych rynkowych w czasie pandemii COVID-19, Wydawnictwo Naukowe Wydziału Zarządzania UW, 2020;
Patrycja Chodnicka-Jaworska, Credit rating na rynku finansowym, PWE, 2019;
Krzysztof Jajuga, Teresa Jajuga, Inwestycje, PWN, 2015;
Stephen F. LeRoy, Jan Werner, Principles of Financial Economics, Cambridge University Press 2 edition, 2014;
Keith Cuthbertson, Dirk Nitzsche, Quantitative Financial Economics: Stocks, Bonds and Foreign Exchange, 2nd Edition, Wiley, 2004.