Syllabus ECON 4333: Financial Economics II Semester 1, 2013/14

Instructor: Denis Tkachenko Lecture Time and Room: Thursday 9am-12pm, AS2-0312 (Lim Tay Boh Seminar Room) Instructor’s Email: ecstd@nus.edu.sg Office: AS2 05-34 Office Hours: Monday 2-4pm, or by appointment

Course Description: This is a second course in financial economics. The focus of the course is on understanding and mastering the fundamental economic underpinnings of valuation of three types of securities: fixed-income (bonds), stocks, and derivative securities such as options and futures. Some topics that will be covered in this course include: basic concepts of time value of money and valuation of fixed-income instruments, term structure models, hedging interest rate risks, expected utility theory, mean-variance portfolio selection, capital asset pricing model, introductory continuous time finance, option valuation models. The students are expected to have acquired basic knowledge of financial markets at the level of EC3333 Financial Economics I. The course is quantitative by nature and will involve empirical applications of techniques and concepts learned in the course through the group project on the relevant topic of students’ choice. Use of Computers: Being able to apply theoretical knowledge to real world data is an important skill. Students will be expected to use some software package they are familiar with to complete the group project (e.g., Excel, Stata, EViews etc.). Students can access Stata and EViews in the computer labs in AS7. Recommended Texts: There is no single text that covers the course material appropriately. The three recommended texts dealing with the three broad topics are as follows: Martellini, L., Priaulet, P. and Priaulet, S.: “Fixed-Income Securities: Valuation, Risk Management and Portfolio Strategies”, Wiley, 2003. (M) Elton, E., Gruber, M. J., Brown, S. J., and Goetzmann, W. N.: “Modern Portfolio Theory and Investment Analysis (8th international edition), Wiley, 2011. (EG) Hull, J. C.: “Options, Futures, and Other Derivatives” (8th Global edition), Pearson, 2012. (H)

work on a small well-defined task of interest (e. The deadline for project proposal (brief description of topic. Note that (M) is available as the e-book on the NUS library webpage (search for E-resources . The lecture will be screencasted and uploaded to IVLE.All books should be available in the Forum NUS Co-op bookstore. Completed homework assignments are to be handed in on the day and at the specified time they are due. will be provided. there were numerous revisions to examples and some material. Elearning week: Note week 5 is the mandatory ELearning week.books). Group Work: The students are encouraged to collaborate on the problem sets in groups.. data. There will be NO exceptions to this policy. (EG) has more focus on stock pricing and portfolio management. but has to be relevant to the course. After the time specified in the deadline it will be considered late. data sources etc. and methods to be used) will be set around Week 9-10 (TBA). I will talk about it more closer to the date. Remember. that group work allows you to learn from each other and discover alternative approaches to the same problem. The deadline for the project will be Wednesday of Week 12. The minimum group size is 2. The choice of the topic is free and up to the student.g. All group members should submit their own copy of the homework. the maximum is 4. as well as tutorial questions that students will be asked to present in class. and clearly indicate the names/matric numbers of the groupmates they worked with. however. You can finish the problem sets independently if you want. The group will produce a writeup of results. Students will work in groups of 3-4 people. . check whether certain form of CAPM holds for Singapore stock exchange). so there will be no class on September 12th. and present the findings in class. The key to effective group work lies in collaborating on all assigned problems. I would recommend the purchase of 1 or 2 books based on the main interest(s) of the student: (M) provides an excellent treatment of fixed-income securities. The key to success in the project is to start thinking about a topic early (not 1 day before the deadline). We will discuss more details on the project in class. 1pm) Homework: There will be two graded homework assignments. other than certified religious or medical excuses. Some guidance regarding topics. 9am) Final exam: 30% (November 30th. Assessment: The weights for continuous assessment and exams are as follows: Homeworks and tutorial presentations: 20% Group Project: 20% (a group presentation of 15-20 minutes to be held in weeks 12 and 13) Midterm exam: 30% (October 3rd. while (H) provides a good treatment of pricing of various derivatives. NO late homework will be accepted. not just splitting them among group members. and some changes in chapter numbering so the onus will be on the student to locate the relevant material when using older editions. material references. Group project: The idea is to get hands-on experience with applying material learnt in the course to data and practice research work and writing on small scale. However. Earlier editions of (EG) and (H) may potentially be used.

medical certs. Part 2: Stock pricing and portfolio selection ((EG) Ch. Term structure of interest rates. (EG) Ch. Feedback: You are highly encouraged to provide me with feedback as we progress through the course.5. Therefore. Hedging interest rate risk: (modified) duration.Option valuation: review of binomial trees. these questions should be posted on the IVLE forum so that everyone can benefit from the answer and have the opportunity to discuss. Empirics vs. (H) Ch. Arrangements to reschedule an exam must be made at the very least 48 hours prior to the exam date and time. Instead. factor models.Exams: There will be one midterm exam. bond yields and prices. Both exams will be open-book.Introduction to continuous time finance: Wiener processes. 4. Also. students should primarily focus on lecture notes and read the sections in the books relevant to what was covered in class. . some material will be drawn from additional sources such as journal articles.. Email Policy: I will NOT answer any email questions pertaining to the course material.Pricing of futures and interest rate derivatives (time permitting). Please restrict the email communication to administrative and personal matters. 21-22) Interest rates. 4. Black-Scholes-Merton model. numerical methods.g.Review of options and trading strategies . The tentative list of topics is as follows: Part 1: Fixed-Income securities ((M) Ch. . classical theories. leave anonymous feedback on IVLE. 2-6. 11-14) . Note that not all of the material in the chapters listed above will be covered. You can come to my office hours. . More detailed references will appear in each chapter of lecture notes. or post suggestions or requests on the EC4333 forum through IVLE. email me. and a cumulative final exam. other books etc. convexity. e. Ito’s lemma. There will be no make-up for the final exam. consultation appointments etc.11-16) Decision making under risk Mean variance portfolio selection Equilibrium asset pricing models: CAPM. I usually check the forum several times a day. APT Empirical evaluation of various forms of CAPM and APT Part 3: Derivative pricing: options and futures ((H) Ch. Deriving zero-coupon yield curves: (extended) Nelson-Siegel and Vasicek models.