Theory of Finance

Master 2020/2021

Category 'Best Course for Broadening Horizons and Diversity of Knowledge and Skills'

Category 'Best Course for New Knowledge and Skills'

Type: Compulsory course (Finance)

Area of studies: Finance and Credit

Delivered by: Department of Finance

Where: St.Petersburg School of Economics and Management

When: 1 year, 1-3 module

Mode of studies: offline

Instructors: Vasilisa A. Makarova, Darko Vukovic

Master’s programme: Finance

Language: English

ECTS credits: 8

Contact hours: 96

Full Syllabus

Abstract

Essentially the course is an introduction to the theory and practice theory of modern financial economics and financial management, with a focus on capital markets and investments, and quantitative finance. It will introduce you to, or help you revise, the basic fundamentals – the most important concepts and analytical tools used in financial decision making, the important role of financial markets in finance, the basic principles of valuation, investing capital in investment opportunities to create value, the meaning and management of risk, and how organizations should raise and invest capital. The course consists of lectures (28 hours) and seminars (28 hours). The seminars involve student presentations (individually or in small groups) of contemporary research on financial system, Theory of Change in finance, corporate and public finance, financial management published in leading economics and finance journals. For each topic, a list of suggested articles is provided by the instructor.

Learning Objectives

The basic objective of this foundation course in finance is to summarize the fundamental theoretical aspects of finance relevant to the future study of finance and application within the scope of your master’s degree.

Expected Learning Outcomes

To know: Patterns of functioning and development trends of the national and global financial system: fiscal, budgetary system, public finance, financial market; Main results of the latest research in the field of finance theory; Differences between the major segments of the financial markets; Efficient market hypothesis; Types of financial intermediaries and their functions; Principles that determine the efficiency of financial operations.
To be able to: Identify key issues of information efficiency of financial markets; Highlight the features of the functioning of financial markets in economies in transition are not clearly fixed the rights of private property; Understand the essence of the changes taking place in the financial markets; Assess the factors affecting the stability of emerging economies; Evaluate the causes of financial crises in developing countries.
To acquire skills in: Possession of the procedure and methodology of scientific research in the professional field; Skills of independent research work; Analysis of the specific situation on the financial markets, budgetary, fiscal system, public finance.

Course Contents

Topic 1. Introduction and history of the financial school
Periods of financial science. The essence of classical and neoclassical theory of finance; The role of individual scientists in the development of financial science; The neoclassical theory of finance; Features of development of financial science in Russia; Russian scientists contribution to the development of financial science.
Topic 2. The financial system, financial markets, the modern theory of finance
The functions of the financial markets. Structure and classification of financial markets (according to the type of financial instruments, according to the method of placement of financial instruments by maturity instruments, according to the method of organization of transactions). The international financial market, eurobonds, euro. International securities market. Financial intermediaries. The role of financial intermediation to ensure the effectiveness of economic development. Types of financial intermediaries. Regulation of the financial system.
Topic 3. Financial assets: bond (theory and yields), shares (equity valuation).
Present value, expectation, and utility
Topic 4. Market efficiency
Trade and Valuation in Financial Markets. No Arbitrage and No Excess Returns. Market Efficiency. Equilibrium. Aggregation and Comparative Statics. Time Scale of Investment Decisions . Behavioral Finance
Topic 5. Mean-Variance theory. Expected utility approach.
Expected Utility Theory. Origins of Expected Utility Theory. Axiomatic Definition . Measuring the Utility Function. Mean-Variance Theory. Definition, Fundamental Properties, Mean–variance analysis and its limitations, First and the second degree stochastic dominance. Approximating an Investor's Utility Function, Negative Exponential Utility Functions, Inferring Investor Risk Tolerance. The problems with “return” measures. (Normal-not normal distribution, log R_1/R_0, Vasicek, Cox–Ingersoll–Ross, ect.)
Topic 6. Alternative measures to mean-variance
Quadratic utility, power utility functions. Kinked utility functions & S-shaped value functions. Full-scale optimization. Mahalonobis-Taguchi System (MTS) approach, T-method. Leading-indicators method. Time-series (TS) models.
Topic 7. Introduction to financial crisis theory. Financial risk management
Business cycle theory. Financial fragility. Herd behavior and Adaptive expectations. Market risk tools and strategies
Topic 8. Advanced Topics in finance.
Theory of the Firm . Firm’s Decision Rules. Fisher Separation. The Theorem of Dr`eze . Information Asymmetries on Financial Markets. Information Revealed by Prices . Information Revealed by Trade . Moral Hazard . Adverse Selection. Summary. Time-Continuous Model. A Rough Path to the Black-Scholes Formula. Limitations of the Black-Scholes Model and Extensions .Volatility Smile and Other Unfriendly Effects . Not Normal: Alternatives to Normally Distributed Returns . Preeforecaster, Box-cox transformation. Jonson’s transformation.
Topic 9. Theory for Financial Decisions
Real Assets versus Financial Assets Financial Markets and the Economy Consumption-Timing Allocation of Risk Separation of Ownership and Management The Players The Financial Crisis
Topic 10. The interest rate theory
Loanable Funds Theory Movement of Interest Rates over Time Determinants of Interest Rates for Individual Securities
Topic 11. Bond Prices and Yields
Bond Characteristics Call Provisions Innovation in the Bond Market Bond Pricing Bond Yields Default Risk and Bond Pricing Sinking Funds The Expectations Theory The Liquidity Preference Theory

Assessment Elements

Homework
In-class activities
Written assignment
Final Examination
The midterm test will take a form of 2 hours (80 min) test of 40 open-ended questions in the LMS environment. The student is exempt from the exam if he has completed all the projects of the course.

Interim Assessment

Interim assessment (3 module)
0.3 * Final Examination + 0.35 * Homework + 0.15 * In-class activities + 0.2 * Written assignment

Bibliography

Recommended Core Bibliography

Copeland, T. E., Weston, J. F., & Shastri, K. (2014). Financial Theory and Corporate Policy: Pearson New International Edition (Vol. 4th ed). Harlow, Essex: Pearson. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1418250

Recommended Additional Bibliography

Bek-Thomsen, J., Christiansen, C. O., Jacobsen, S. G., & Thorup, M. (2017). History of Economic Rationalities : Economic Reasoning As Knowledge and Practice Authority. Cham, Switzerland: Springer. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1489353

Course Syllabus