ECO 5281-01: Financial Economics 1

Spring 2013 TR 12:30–1:45PM BEL 033

Instructor: Paul Beaumont Office: Bellamy 276 Phone: 644-7085 Email: (the best way to reach me) Office Hours: TR 2:00–3:30PM or by appointment

Course Materials: There is no required text for the class. I will post readings on the course Blackboard page in the Course Library folder. The primary source will be Lectures on Financial Economics, March 2012, by Antonio Mele. There will be a link to these notes in the Course Library on the class Blackboard page. Make sure that you have the March 2012 version of Mele’s notes as he also has and earlier set of notes from 2005. Texts that I have used previously for this class and may be of interest to you include: Principles of Financial Economics by Stephen LeRoy & Jan Werner (Cambridge Univ. Press, 2001). Asset Pricing: Revised Edition by John Cochrane (Princeton Univ. Press, 2005). Financial Economics: A Concise Introduction to Classical and Behavioral Finance by Thorsten Hens and Marc Oliver Rieger (Springer, 2010). Intermediate Financial Theory, 2nd edition by Jean-Pierre Danthine and John B. Donaldson (Elsevier Academic Press, 2005) Financial Economics by Eichberger & Harper (Oxford Univ. Press, 1997). Course Description: Financial Economics I is intended to provide the theoretical foundations of finance and financial engineering and to connect these theories to current financial practices. After a brief review of classical financial theory to develop the Capital Asset Pricing Model we will derive the consumption-based CAPM and the important roles that martingales, pricing kernels and term structure models play in modern financial theory. Once we have sketched out the essential theory we will examine equity and fixed-income markets including options, swaps, swaptions, caps, floors, credit default swaps, and value at risk measures. Finally, we will discuss recent developments in behavioral finance and how those ideas relate to the discussions of the relevance of financial theory in the post 2008 financial crisis era. Course Objectives: By the end of this course you should be familiar with: the essential theoretical framework which underlies modern finance; the dynamic programming models used in asset pricing theory; the various equilibrium and arbitrage pricing methods and the relationships between them; expected and nonexpected utility theory; the role of complete and incomplete markets in asset pricing; and optimal portfolio selection. Specific applications that you should become familiar with are the CAPM, C-CAPM and APT pricing models, the term-structure


of interest rates, option pricing models, pricing methods for fixed-income securities, and recent developments in behavioral finance. Grading: Your course grade will be determined as follows: 1/3: Homework and class preparation. 1/3: Exam 1: Tuesday, February 26. 1/3: Exam 2: Thursday, April 15. Note that the second exam is on the last class day. There will be no final exam during the scheduled final exam week (April 3). You must take both exams. There will be no make-up exams unless you have a verifiable medical excuse validated by the Dean of Students. Plan accordingly. Do not schedule job interviews, etc., on these exam dates. We will try to stick with these exam dates no matter where we are in the course material. Assignments and Responsibilities: Readings: Class readings will be available on the class blackboard page in the “Course Library” folder. You are expected to read the material before coming to class and be prepared for in-class discussion. Class Discussion: Since this is a graduate level course, I do not intend to read the papers to you. You should read the assigned material before coming to class and come to class prepared to ask questions about material that you did not understand clearly. I will focus on problem solving and interpretation of the material but my primary role is to try to answer your questions. I do not take attendance in the class but you will find it difficult to do well in the class if you do not attend regularly. Exercises: I will assign regular exercises to help you prepare for the exams and to better understand the material. I will post the assignments in the “Assignments” folder of the class blackboard page and you will post your solutions on the class Exercises Forum. We will discuss the solutions to these problems in class as needed and I may ask some of you to come to the board to explain the solutions to the class. The exams will be drawn from these problems and variations on them. To make the workload more manageable, you will work in groups of 4 or 5 on the exercises.


Approximate Course Schedule: We will follow the Mele notes quite closely with some supplemental material added where needed. Throughout the semester you should expect to read about 30 pages of material per class period. Week 1 2 3 4 5 6 7 2/26 8 9 10 11 12 13 14 15 4/18 Topics Classical finance theory CAPM Infinite horizon models & C-CAPM Martingales Continuous time models The pricing kernel The stock market Exam 1 Options Term structure Term structure Interest rates Fixed-income derivatives Credit risk Measuring risk, Var & CoVaR Behavioral finance Exam 2 Reading Mele–1 Mele–2 Mele–3 Nawalkha & Beliaeva Mele–4 Mele–6 Mele–7 Mele–10 Mele–11 Mele–11 Mele–12 Mele–12 Mele–13 WSJ; Farmer; Cochrane


Academic Honor Code: Students are expected to uphold the Academic Honor Code published in The Florida State University Bulletin and the Student Handbook. The Academic Honor System of The Florida State University is based on the premise that each student has the responsibility (1) to uphold the highest standards of academic integrity in the student’s own work, (2) to refuse to tolerate violations of academic integrity in the university community, and (3) to foster a high sense of integrity and social responsibility on the part of the university community. Please see the following web site for a complete explanation of the Academic Honor Code. ( Americans with Disabilities Act: Students with disabilities needing academic accommodation should: (1) register with and provide documentation to the Student Disability Resource Center; (2) bring a letter to the instructor indicating the need for accommodation and what type. This should be done during the first week of class. For more information about services available to FSU students with disabilities, contact the Student Disability Resource Center 97 Woodward Avenue, South 108 Student Services Building Florida State University Tallahassee, FL 32306–4167 (850) 644-9566 (voice) (850) 644-8504 (TDD) Syllabus Change Policy: Except for changes that substantially affect implementation of the evaluation (grading) statement, this syllabus is a guide for the course and is subject to change with advance notice.

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