Bachelor
2018/2019

## Financial Economics

Category 'Best Course for Career Development'

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

Type:
Elective course (Economics)

Area of studies:
Economics

Delivered by:
School of Finance

When:
3 year, 1, 2 module

Mode of studies:
Full time

Language:
English

ECTS credits:
5

### Course Syllabus

#### Abstract

This is an introductory course in Finance which covers the basic principles of financial markets and asset pricing. We will discuss different financial instruments and how to use them for investment or hedging purposes. We will proceed to the basics of asset valuation. The starting point will be the present value formula. We will then talk about fixed-income securities, their valuation and the term structure of interest rates. The course will then move to stocks, starting with portfolio theory and then deriving the relation between risk and return. We will study the main asset-pricing models: the CAPM and the APT. We will talk about empirical multifactor models and various risk factors. We will discuss the major asset-pricing anomalies and investment strategies which exploit them. Finally, we will turn to derivatives, their replication and valuation based on no-arbitrage principle, and the use of them for hedging purposes. The course consists of lectures and classes. Each lecture is followed by a class where students solve numeric problems. There are short quizzes in classes and two written home assignments. You must write a quiz in the class to which you are assigned. Attendance of other classes is only permitted in exceptional circumstances, and the class-teachers must be notified in advance. There is a written mid-term test in the middle of the course and a written final test at the end of the course. There is no make-up for the tests. If a student misses a quiz or a written test due to illness, the final grade is determined as follows: Final grade = Cumulative grade/(1-ωi/2), where ωi is the weight of test i. However, a student may miss EITHER a mid-term test OR a final test, but not both. If a student’s cumulative grade is below the pass bar, or if the student missed the both tests, the re-take procedure follows the HSE rules. The course requires a sufficient amount of self-study.

#### Learning Objectives

- Familiarize students with various financial instruments, financial markets and basic principles of asset pricing and risk management.
- Students will be familiar with financial terminology in English and Russian.
- Students will know how to form and diversify portfolios of assets, how to find expected returns and risks of assets and portfolios of assets.
- Students will be able to find fair prices of financial assets and make investment decisions.
- Students will know the notion of risk premium and models characterizing equilibrium risk premiums.
- They will also be familiar with the most popular asset-pricing anomalies and the basics of behavioral pricing.

#### Expected Learning Outcomes

- Be able to use different financial instruments for investment or hedging purposes
- know how to form and diversify portfolios of assets
- know how to find expected returns and risks of assets and portfolios of assets
- be able to find fair prices of financial assets and make investment decisions
- know the notion of risk premium and models characterizing equilibrium risk premiums
- be familiar with the most popular asset-pricing anomalies and the basics of behavioral pricing

#### Course Contents

- Financial markets and instrumentsDirect and indirect financing, their advantages and disadvantages, debt and equity instruments, money market instruments, capital market instruments, derivatives. Types of financial markets. Anglo-Saxon and German financial models.
- DiscountingFuture value, present value, discount rate, discount factor, net present value rule, annuity, perpetuity, valuing annuities and perpetuities with and without growth, return definitions: realized return, required return, fair return, hurdle rate, expected return, opportunity cost of capital, weighted average cost of capital, compound and simple interest rates, nominal and real interest rates.
- Bond marketBonds, coupons, discount bonds, consol bonds, convertible bonds, callable bonds, yield to maturity, coupon yield, valuation of bonds, duration, term structure of interest rates.
- Stock marketCommon and preferred stocks, dividends, cumulative and non-cumulative stocks, IPO, secondary market, par value, book value, market value, holding period return, capital gain, dividend yield, payout ratio, retention ratio, EPS, P/E ratio, return on equity, valuation of stocks: Dividend Discount Model, Gordon growth model, present value of growth opportunities.
- Portfolio theory and diversificationMeasuring risk: variance and standard deviation of returns, covariance and correlation, portfolio expected return, portfolio variance, idiosyncratic (nonsystematic) and market (systematic) risk, diversification, market beta, Sharpe ratio, Treynor ratio.
- Asset pricing models: the CAPMMarkowitz portfolio theory, mean-variance analysis, efficient frontier, two-fund separation theorem, the market portfolio, the Capital Asset Pricing Model (CAPM), capital market line, security market line, criticism of the CAPM.
- Asset pricing models: the APTMultifactor models, factor betas, replicating portfolios, factor replicating portfolios, the Arbitrage Pricing Theory (APT).
- Empirical multifactor modelsSize and value premiums, the 3-factor Fama-French model, momentum strategies, the Carhart 4-factor model, liquidity risk factor, volatility risk factor, downside risk factor, two-beta CAPM, local and global multifactor models, the 5-factor Fama-French model.
- Options and option pricingTypes of options, option pricing, option premium, replication of options, the one-period binomial model, the multi-period binomial model, the risk-neutral pricing, the Black-Scholes formula, the put-call parity, hedging by options, portfolios of options.
- Types of information in financial marketsNotion of market efficiency, strong, semi-strong and weak form efficiency, implications of the Efficient Markets Hypothesis: technical and fundamental analysis, tests of market efficiency, no-arbitrage principle.
- Asset-pricing anomaliesMood and asset pricing: weather effect, seasonality, holidays, geomagnetic storms, lunar phases, sport competitions and games, terrorist attacks.
- Arbitrage strategiesMultifactor models, factor betas, replicating portfolios, factor replicating portfolios, the Arbitrage Pricing Theory (APT).

#### Assessment Elements

- Participation in classes (6%)
- quizzes (6%)
- home assignments (8%)
- mid-term test (25%)There is no re-take for the mid-term test and quizzes. If a student misses a quiz or the mid-term test due to illness, the final grade is determined as follows: Final grade = Cumulative grade/(1-ωi/2), where ωi is the weight of test i.
- final test (55%)If a student misses the final test due to an illness, it must be written during the re-take period, and the final grade will be determined according to the formula above. If a student’s final grade is below the pass bar, the re-take procedure follows the HSE rules.

#### Interim Assessment

- Interim assessment (2 module)0.55 * final test (55%) + 0.08 * home assignments (8%) + 0.25 * mid-term test (25%) + 0.06 * Participation in classes (6%) + 0.06 * quizzes (6%)

#### Bibliography

#### Recommended Core Bibliography

- Cuthbertson, K., & Nitzsche, D. (2004). Quantitative Financial Economics : Stocks, Bonds and Foreign Exchange (Vol. 2nd ed). Chichester, England: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=130854
- Rita Biswas, & Michael Michaelides. (2019). Essays in Financial Economics. Bingley: Emerald Publishing Limited. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=2181120

#### Recommended Additional Bibliography

- Hens, T. Financial Economics: A Concise Introduction to Classical and Behavioral Finance / Thorsten Hens, Marc Oliver Rieger. – 2nd ed. – Berlin: Springer-Verlag, 2016. – (Springer Texts in Business and Economics). - Текст: электронный // DB Springer Books [сайт]. – URL: https://link.springer.com/book/10.1007/978-3-662-49688-6