Advanced Topics in Financial Economics - EC824

Looking for a different module?

Module delivery information

Location Term Level1 Credits (ECTS)2 Current Convenor3 2021 to 2022
(version 5)
Spring 7 15 (7.5) DR K Shibayama checkmark-circle


The aim of this module is to offer an in-depth theoretical treatment of advanced topics in financial economics, such as derivative pricing and real options. Simultaneously the module discusses the theoretical basis for computational approaches to asset pricing. The module consists of three main parts. In the first part we review selected elements of probability theory and stochastic calculus. We then discuss two prominent solution ideas for the derivative pricing. One is based on the Girsanov theorem and properties of martingale processes. The other is related to the Feynman-Kac's stochastic representation. In both cases, the well-known Black-Scholes-Merton formula is solved as a special case. In the second part we study a couple of important stochastic processes such as Vasicek process, which is widely used to characterize the dynamics of short-term interest rate. In the third part we deal with real option problems. The latter are workhorse models for irreversible decisions under uncertainty. Combined, the three parts form a broad theoretical perspective of advanced analytical methods in the contemporary financial economics practice.


Contact hours

Total contact hours: 30
Private study hours: 120
Total study hours: 150

Method of assessment

10% Problem Sets (1)
10% Problem Sets (2)
80% Examination (2 hours)

Reassessment Method: 100% Exam

Indicative reading

Core reading

* Björk, Thomas. Arbitrage theory in continuous time. 3rd Edition. Oxford University Press, 2009.

* Dixit, Avinash, and Robert Pindyck. Investment under Uncertainty, Princeton University Press, 1994.

Recommended reading

* Baxter, Martin, and Andrew Rennie. Financial Calculus: An introduction to derivative pricing. 17th Edition. Cambridge University Press, 1996.

* Cochrane, John. Asset Pricing. (Revised Edition). Princeton University Press, 2009.

* Pliska, Stanley. Introduction to Mathematical Finance: Discrete Time Models. Blackwell, 1997.

* Wilmott, Paul, Howison, Sam and Jeff Dewynne. The mathematics of financial derivatives: a student introduction. Cambridge University Press, 1995.

See the library reading list for this module (Canterbury)

Learning outcomes

On successfully completing the module students will be able to:

8.1 critically understand and flexibly apply stochastic calculus and basic probability theory

8.2 comprehensively understand martingale measure theory and its key elements

8.3 comprehensively understand dynamic programming and the mechanics of the optimal choice of investor

8.4 understand real options and their applications


  1. Credit level 7. Undergraduate or postgraduate masters level module.
  2. ECTS credits are recognised throughout the EU and allow you to transfer credit easily from one university to another.
  3. The named convenor is the convenor for the current academic session.
Back to top

University of Kent makes every effort to ensure that module information is accurate for the relevant academic session and to provide educational services as described. However, courses, services and other matters may be subject to change. Please read our full disclaimer.