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EC822 Economics of Financial Markets and Instruments
Convenor: Prof Jagjit S. Chadha
Email: J.S.Chadha@kent.ac.uk
Introduction
The economic analysis of financial markets and instruments is the starting point of financial economics and this course will provide a concise overview of capital markets. Specifically, we shall understand how the economics of uncertainty have been applied extensively in financial markets. We shall use a recent textbook by Roy Bailey as our main textbook. But also supplement the lectures with examples from the world of finance. To that extent students are strongly encouraged to read recent periodical outputs from organisations such as the Bank of International Settlements, ECB, the IMF and the Bank of England.
This MSc module on financial markets and instruments emphasises both practical knowledge and analytical techniques. Specifically, it focuses on the structure of each financial market (such as the trading volume and investors in it), recommended investment strategies for a specific type of investors, and market conventions. Also, several useful mathematical skills are explained.
The module first introduces key principles, such as discounting, diversification, no arbitrage and hedging, and then discusses each asset class, such as bonds, equities and their derivatives (instruments), emphasising the general idea behind them. Although different types of assets require different methods of valuations and risk control, the basic principles are common to all asset classes. The asset liability management (ALM) and other related topics are also presented.
The economic analysis of financial markets and instruments is the starting point for understanding financial markets. This module is compulsory for MSc in Economics and Finance, and is a pre-requisite for EC824: Financial Economics II (Asset Pricing). This module contributes substantially to the study skills acquired in the Economics and Finance MSc, for which it is compulsory, and is an option for other MSc programmes.
Topics
- General Principles of Investment: CAPM, Efficient Market Hypothesis and Random Walk, etc.
- Equity Strategies and Related Topics: Analyses on Financial Statements, Performance Evaluation, etc.
- Bond Strategies and Related Topics: Duration and Convexity, Credit Risk, ALM, etc.
- Forex, Derivatives, Alternative Investments and Other Topics: Foreign Exchange, Options, Swaps, Futures and Forwards, Real Estate and Hedge Funds
Background Reading
Students should routinely read the latest journals form key policy making bodies, to relate financial developments back to class. I provide below some weblinks, but do also ask me whether something is worth reading!
- http://www.bis.org/publ/quarterly.htm
- http://www.bankofengland.co.uk/publications/index.htm
- http://www.ecb.int/pub/mb/html/index.en.html
- http://www.ecb.int/pub/fsr/html/index.en.html
Finally many of the current debates can and should be followed in the financial press e.g. the Financial Times and the Wall Street Journal. Martin Wolf of the FT also maintains a forum where leading economists
- http://blogs.ft.com/wolfforum/
Also read my own blog at:
- http://calibrecon.blogspot.com/
Reading
- Frank K. Reilly and Keith C. Brown, Investment Analysis and Portfolio Management, Dryden Press.
- John C. Hull, Options, Futures, and Other Derivatives, Prentice Hall.
- Frank J. Fabozzi (ed.) Selected Topics in Equity Portfolio Management, John Wiley & Sons.
- Jonathan B. Berk (2005) Five Myths of Active Portfolio Management, Journal of Portfolio Management.
- Bank of England, The framework for the Bank of England's operations in the sterling money markets (The 'Red Book').
- Simon Gray, Repo of Government Securities, Bank of England.
- Peter Isard, Exchange Rate Economics, Cambridge University Press.
- Hudson-Wilson et al. (2005) Why Real Estate?, Journal of Portfolio Management.
- William Fung and David A. Hsieh (1999) A Primer on Hedge Funds, Journal of Empirical Finance.
Please check for the latest edition.
Module outline
Download the EC822 module outline here.