Financial Economics 2600-MFBRz1EF
LECTURE
- Financial economics – basic concepts
- Equilibrium in the financial market (securities market, agency 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 functioning of returns, linear equilibrium, pricing in regulated markets, optimization problem
- Arbitrage and strong arbitrage, diagram representation, cost function, arbitrage and optimal portfolios, equilibrium pricing
- Portfolio restrictions (short sale constraints, portfolio choice under short sale constraints, the law of one price, restricted and unrestricted arbitrage, equilibrium rate)
- Volatility and equilibrium theory, risk-neutral pricing, volatility and portfolio constraints
- Risk and expected utility, Von Neumann-Morgenstern theory, axioms of utility under state control, axioms of expected utility
- 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 statics of optimal portfolios (wealth, unexpected returns, risk)
- Optimal portfolios considering multiple risks (risk return, 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/futures markets (disequilibrium in long-term financial markets, disequilibrium and information, asset span, first equilibrium condition, arbitrage, dynamic markets, event analysis, Pareto equilibrium)
- Rational bubbles and learning
- Behavioral finance and market anomalies
- Market behavior models
- EMH (Efficient Market Hypothesis) testing theory
- Affine models and SDF (Stochastic Discount Factor)
- Testing CIP, UIP, and FRU
- Investments and bankruptcy theory
- ESG as a new risk factor
TUTORIALS
- Financial economics – basic concepts
- Modeling financial markets (normality tests, random walk, cointegration, Monte Carlo simulation)
- Testing EMH
- Stock price predictions using residual tests, ECM, non-linear models, Markov models
- Building equilibrium under linear pricing conditions
- Risk modeling in investment decision-making
- Risk aversion
- Optimal portfolios
- Comparative statics 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/futures markets
- Market behavior models
- Probability modeling
- EMH testing theory
- Affine models and SDF
- Testing CIP, UIP, and FRU
- Bankruptcy risk modeling
Type of course
Learning outcomes
- K_W01: Demonstrates an in-depth understanding of research methodology and terminology in the field of economics and finance, as well as in complementary disciplines (management and quality sciences, legal sciences).
- K_W02: Possesses deep knowledge of principles, procedures, and practices regarding investment advisory and capital markets.
- K_W05: Understands 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 regarding information system architecture.
- K_U01: Can utilize the theory of economics and finance, alongside complementary disciplines (management and quality sciences, legal sciences), to identify, diagnose, and solve problems related to financial decisions in investment advisory and capital markets.
- K_U02: Appropriately interprets complex technological, social, political, legal, economic, and ecological processes and phenomena, evaluating their impact on financial decisions in organizations, the functioning of organizations, and the economy as a whole.
- K_K01: Displays a capacity for evaluation and 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).
Tutorials: Ongoing evaluation (class preparation and activity), mid-semester written control tests, attendance checks, term paper. Submitting the group project is a mandatory condition to pass the tutorials.
Learning outcomes are verified continuously via tasks performed by participants during tutorials, at the end of the tutorials (final test), and during the lecture exam.
Lecture weightings:
- Written exam: 100% of the lecture component grade
- Achieving an excellent grade (5.0) in tutorials accounts for 20% of the course grading adjustment consideration.
- Up to 10% in bonus points for exceptional activity.
Tutorial weightings:
- 10% class activity/participation
- 70% group project
- 20% final test (kolokwium)
Course Passing Requirements (Exam):
Written on-site exam (100% of the grade) consisting of open, tabular, and closed questions. Only students who have passed the tutorials are eligible to take the exam. The minimum passing threshold is 51%.
A total of 30 points can be earned on the exam, translating into the final grade as follows:
- 0% - 50% of points: insufficient / fail (2)
- 51% - 60% of points: satisfactory (3)
- 61% - 70% of points: satisfactory plus (3.5)
- 71% - 80% of points: good (4)
- 81% - 90% of points: good plus (4.5)
- 91% - 100% of points: very good (5)
Tutorial Passing Requirements:
Based on a 100-point system distributed across activity (10%), group project (70%), and final test (20%). Grades are determined as follows
- 0 - 50 points: insufficient / fail (2)
- 51 - 60 points: satisfactory (3
- 61 - 70 points: satisfactory plus (3.5)
- 71 - 80 points: good (4)
- 81 - 90 points: good plus (4.5)
- 91 - 100 points: very good (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.