Economics of Finance 1 - EC562

Location Term Level Credits (ECTS) Current Convenor 2018-19 2019-20
Canterbury Autumn
View Timetable
6 15 (7.5) DR AJM Duncan


EC500 Microeconomics, EC502 Macroeconomics





This module provides an overview of the main instruments in financial markets, the motivation for trade in these assets and the pricing of these assets. Specifically, we show how the economics of uncertainty motivates trade in a wide range of financial assets. This helps us determine how the risk and maturity of different assets affects the demand for those assets.

First, the module introduces the key principles of asset pricing: discounting, diversification, arbitrage and hedging. Second, the module introduces and motivates the use of debt, equity and derivative instruments in financial markets. Third, the module applies the key principles of asset pricing to help understand the behaviour of prices across these asset classes. While different classes of assets expose their holders to different types of risks, the key principles of asset pricing are common to all asset classes. This concept is formalised by the Fundamental Theorem of Asset Pricing.

While focusing on financial applications, the module does speak more widely to methodological challenges encountered when testing economic theories against data. These challenges are particularly relevant in financial economics. While the literature has developed a range of innovative techniques to more effectively test competing theories against the data, the answers to a number of key questions remain contested.


This module appears in:

Contact hours

10 lectures
6 seminars
3 drop-in sessions

Method of assessment

10% In Course Test
10% Essay (1500 word)
80% Examination (2 hours)

Preliminary reading

R E Bailey, The Economics and Financial Markets, Cambridge University Press, 2005
P I Bernstein, Against the Gods - the Remarkable Story of Risk, John Wiley, 1996

There are no required preliminary readings for this course. The course does rely on quantitative analysis to evaluate competing theories, and students are expected to have an introductory understanding of calculus, probability and statistics.

For an introduction to the main controversies addressed in the course, students are encouraged to read A Random Walk Down Wall Street, by Burton Malkiel and/or Irrational Exuberance, by Robert Shiller.

See the library reading list for this module (Canterbury)

See the library reading list for this module (Medway)

Learning outcomes

By the end of the module, you will

•have improved your analytical skills in using mathematics to analyse financial markets,
•have developed your ability to solve financial problems and present your solutions orally and in written form
•have improved your ability to relate intuitive and mathematical explanations of financial analysis,
•understand the different methods of risk control and valuation of different financial assets,
•understand and be able to use the concepts of discounting, diversification and Capital Asset Pricing Model, arbitrage and hedging and understand the different types of asset class,
•have improved your ability to evaluate theoretical results against empirical evidence and
•have improved your internet literacy in collecting and processing information from the internet and other sources

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