Lectures on Financial Economics
These Lectures on Financial Economics are based on notes I wrote in support of advanced undergraduate and graduate lectures in ?nancial economics, macroeconomic dynamics, ?nancial econometrics and ?nancial engineering.
Part I, “Foundations,” develops the fundamentals tools of analysis used in Part II and Part III.
These tools span such disparate topics as classical portfolio selection, dynamic consumption and production- based asset pricing, in both discrete and continuous-time, the intricacies underlying incomplete markets and some other market imperfections and, ?nally, econometric tools comprising maximum likelihood, methods of moments, and the relatively more modern simulation-based inference methods.
Part II, “Applied asset pricing theory,” is about identifying the main empirical facts in ?nance and the challenges they pose to ?nancial economists: from excess price volatility and countercyclical stock market volatility, to cross-sectional puzzles such as the value premium. This second part reviews the main models aiming to take these puzzles on board.
Part III, “Asset pricing and reality,” aims just to this: to use the main tools in Part I and the lessons drawn from Part II, so as to cope with the main challenges occurring in actual capital markets, arising from option pricing and trading, interest rate modeling and credit risk and their associated derivatives. In a sense, Part II is about the big puzzles we face in fundamental research, while Part III is about how to live within our current and certainly unsatisfactory paradigms, so as to cope with demand for intellectual expertise.
These notes are still underground. The economic motivation and intuition are not always developed as deeply as they deserve, some derivations are inelegant, and sometimes, the English is a bit informal. Moreover, I still have to include material on asset pricing with asymmetric information, monetary models of asset prices, theories about the nominal and the real term structure of interest rates, bubbles, asset prices implications of overlapping generations models,or ?nancial frictions and their interconnections with business cycle developments. Finally, I need to include more extensive surveys for each topic I cover, especially in Part II. I plan to revise these notes to ?ll these gaps. Meanwhile, any comments on this version are more than welcome.
Antonio Mele
Universidad de Lugano
Marzo 2012
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