Master
2021/2022
Financial Economics
Type:
Compulsory course (Financial Economics)
Area of studies:
Economics
Delivered by:
International College of Economics and Finance
When:
2 year, 1, 2 module
Mode of studies:
offline
Open to:
students of one campus
Master’s programme:
Financial Economics
Language:
English
ECTS credits:
5
Contact hours:
58
Course Syllabus
Abstract
The main objective of Financial Economics II is to present the modern approach to the financial analysis of a company and to teach the principles and techniques of evaluating the most important corporate decisions. The core of the course is the analysis of investment (capital budgeting) and financing (capital structure) decisions of a firm. We will first discuss the principles and techniques of selecting investment projects. Secondly, we will examine the determinants of the capital structure choices by firms as well as the notion of the optimal capital structure. We will then discuss how to value a company, taking into account its capital structure. We will also analyze how firms decide on their payouts to shareholders and what the optimal payout policy should be. Finally, time permitting, we will cover some special topics, such as initial public offerings, corporate governance, behavioral corporate finance.
Learning Objectives
- The goal of the course is to introduce the students to the relevant modeling techniques for asset pricing.
- This course gives an introduction to the economics and mathematics of financial markets. Being the first course in finance within the ICEF Master Programme in Financial Economics, it introduces the students to the relevant modeling techniques for asset pricing. This will be useful for later courses in Corporate Finance, Fixed Income, Derivatives and Risk Management.
- To present the modern approach to the financial analysis of a company.
- To teach the principles and techniques of evaluating the most important corporate decisions: investment, capital structure, payout policy.
- To provide understanding of factors/forces that affect firm value
- To develop fundamental valuation skills
Expected Learning Outcomes
- - use basic concepts and terminology met in books and articles on finance
- Ability to analyze and evaluate financial decisions of a firm
- Ability to bring finance theory into practice
- Apply no-arbitrage pricing in the dynamic context
- Apply representative agent analysis to solve a simple portfolio choice problem and determine equilibrium expected returns
- Be able to build a social welfare function
- Be able to express equilibrium prices under the physical and the risk-neutral measures
- be able to price vanilla bond instruments
- construct efficient frontiers and find the optimal portfolio by applying mean-variance analysis
- construct replication portfolio and Binomial trees for option pricing
- differentiate between two types of arbitrage strategies
- explain and apply the No-Arbitrage Principle for pricing contingent claims
- explain the application o findividual preferences theory in the financial models
- Explain the application of probability theory to the modeling of the flow of information in dynamic economies
- Explain the basic Arrow-Debreu framework and how it relates to the financial market framework
- Explain the connection with informational efficiency
- explain The Fundamental Theorem of finance and market completeness concept
- Explain the intuition behind the two-fund separation theorem and the CAPM formula
- Fundamental valuation skills
- List the particular properties of economies where agents have linear risk tolerance
- List the properties of mean-variance economies and be able to compare them to economies with linear risk tolerance
- outline principles of dynamic programming in financial models
- Outline the notions of Pareto and constrained Pareto optimality
- Understanding of factors/forces that affect firm value
- use mean-variance analysis in the environment with and without risk-free rate
Course Contents
- Basic Concepts in Financial Markets:
- Introduction to Part II. Investment decision rules.
- Contingent Claims, No-Arbitrage Principle and Derivative Pricing
- Advanced capital budgeting: real options
- Optimal Consumption and Portfolio Choice
- Financial statements. Free Cash Flow. Evaluating a project
- Equilibrium Models: Static Economies
- Capital structure. Perfect world
- Equilibrium Models: Dynamic Economies
- Capital structure. Effects of taxes and costs of financial distress
- Capital budgeting and valuation with leverage
- Capital structure. Effects of agency problems
- Capital structure. Effects of asymmetric information
- Payout policy
- Initial public offerings
- Corporate governance
- Behavioral corporate finance
Assessment Elements
- home assignments
- Midterm Exam
- Final Exam
- Test
- Home Assignments
- Cases
- Midterm exam
- Final examOnline format
Interim Assessment
- 2020/2021 4th module0.45 * Final Exam + 0.25 * Midterm Exam + 0.15 * Test + 0.15 * home assignments
- 2021/2022 2nd module0.2 * Midterm exam + 0.4 * Final exam + 0.2 * Home Assignments + 0.2 * Cases
Bibliography
Recommended Core Bibliography
- Corporate finance, Berk, J., 2014
- Introduction to the economics and mathematics of financial markets, Cvitanic, J., 2004
- Theory of Asset Pricing, Pennacchi, G., 2008
Recommended Additional Bibliography
- Asset pricing, Cochrane, J. H., 2005
- Baker, M., & Wurgler, J. (2013). Behavioral Corporate Finance: An Updated Survey. Handbook of the Economics of Finance, 357. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.h.eee.finchp.2.a.357.424
- Financial markets and corporate strategy, Hillier, D., 2012
- Financial theory and corporate policy, Copeland, T. E., 2005
- Malmendier, U., 2018. Behavioral corporate finance. In Handbook of Behavioral Economics: Applications and Foundations 1 (Vol. 1, pp. 277-379). North-Holland.
- The theory of corporate finance, Tirole, J., 2006