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Regular version of the site
Bachelor 2023/2024

Theory of Finance

Area of studies: Economics
When: 4 year, 1, 2 module
Mode of studies: offline
Open to: students of one campus
Instructors: Alexei Boulatov, Dmitry Makarov, Деев Андрей Дмитриевич
Language: English
ECTS credits: 4
Contact hours: 64

Course Syllabus

Abstract

Prerequisites: microeconomics, basic calculus and probability theory, linear algebra The course consists of two parts: Part 1 is devoted to theoretical behavioral finance and Part 2 is devoted to microstructure of financial markets. Part 1 of the course, taught by Dmitry Makarov, examines asset pricing implications of several ``irrational’’ aspects of human behavior. According to the rational finance paradigm, it is true that some investors may be driven by psychological factors, emotions, limited attention, etc, however these features are not likely to affect aggregate quanties – asset prices, asset volatilies. Behavioral finance researchers disagree by showing, both theoretically and empirically, that accounting for various behavioral factors can help explaining empirical evidence that is hard to explain under the rational paradigm. In this part of the course, we will examine in detail several behavioral finance models that have helped to establish behavioral finance as an important branch within financial economics. Part 2 of the course, taught by is an introduction into some basic concepts and models of the microstructure theory of financial markets. Theoretical Market Microstructure is intended to develop economic models of financial markets within a “microscopic” approach when one explicitly takes into account a particular market design and types of agents involved in a trading process. One application of the Market Microstructure models is analysis of the impact of market organizational structure on various important market characteristics, such as price efficiency, transaction costs, liquidity, etc., and to construct quantitative indicators of market quality. Both Part 1 and Part 2 are based on original academic research papers on Behavioral Finance and Market Microstructure theory. The emphasis is on the finance models that are sufficiently simple and analytically tractable. The goal is to provide students with the tools and basic knowledge required to understand and analyze original academic papers.
Learning Objectives

Learning Objectives

  • The objective of the course is to undertake a rigorous study of recent developments in behavioral finance and market microstructure. The goal is to teach the students the following skills:
  • Ability to identify the scientific nature of the problems in the areas of behavioral finance and microstructure
  • Efficient collaboration with other students
  • Ability to intelligently build communication based on the goals and situation of communication
  • Based on the description of economic processes and phenomena, build theoretical and econometric models, analyzing and meaningfully interpreting the results obtained
Expected Learning Outcomes

Expected Learning Outcomes

  • define the main concepts of behavioral finance and microstructure
  • formulate real world phenomena in the language of finance modelling
  • illustrate relevance of behavioral finance and microstructure models both in written and oral communications
  • know the details of main models and methods used in these areas
Course Contents

Course Contents

  • Introduction to behavioral finance
  • Ambiguity aversion
  • Limits to arbitrage
  • Review
  • Price taking, Rational Expectations, and Strategic trading models
  • Dynamic trading strategies
  • Applied topics
Assessment Elements

Assessment Elements

  • non-blocking presentation of the papers in class
  • non-blocking home assignments
  • blocking final exam
Interim Assessment

Interim Assessment

  • 2023/2024 2nd module
    0.6 * final exam + 0.15 * home assignments + 0.25 * presentation of the papers in class
Bibliography

Bibliography

Recommended Core Bibliography

  • Shleifer, A. (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.b.oxp.obooks.9780198292272
  • The microstructure of financial markets, Jong de, F., 2009

Recommended Additional Bibliography

  • Richard K. Lyons. (2006). The Microstructure Approach to Exchange Rates. The MIT Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.b.mtp.titles.026262205x