Published Nov 27, 2023
Topics covered include: expected utility theory, no-arbitrage pricing, equilibrium-pricing models, derivative-security pricing, asymmetric information, capital structure theory and dividend policy.
This course is about financial economics; that is, the study of financial markets from an economic perspective. We will analyze financial questions using the language of economics (concepts like adverse selection and externalities). It is a theoretical, not data, course which means we will make use of the tools of calculus and probability, not econometrics. First we will consider the benchmark financial market equilibrium model, where traders optimize and asset prices clear markets. Then we will consider game theoretic financial models, where externalities arise from market power and information.
There are two things you need to do to be successful in this course: come to lecture and do your homework (well, these are necessary but not sufficient conditions). Unlike other courses you may be used to, there will be very little reading. Why? I will cover some advanced topics directly from a combination of books and papers, which I list below but do not expect you to read. Lecture notes should be sufficient for full understanding of the course material. Try to expose yourself to the course material in as many ways as you can; this includes asking questions in lecture, emailing questions, coming to office hours, and forming study groups.
| Articulate standard financial economic theory (for example to practitioners) |
| Propose new research ideas in the intersection of finance and game theory |
I have picked out what I think are the “main pillars” of financial economics and listed them in the course outline below. There will be a lot of problem solving, as these are theoretical/ mathematical models of finance. Any math beyond calculus will be reviewed in class; expect a rigorous treatment of these topics below.
Choice under Uncertainty (finish this before Midterm 1)
Asset pricing (finish this before Midterm 2)
Game theoretic finance
| Title / Name | Notes / Comments | Required |
|---|---|---|
| Uncertainty, Risk, and Information | G. Bonanno. Independently Published, 2019. | No |
| Theory of Incomplete Markets | M. Magill and M. Quinzii. MIT Press, 1996. | No |
| Equilibrium in Competitive Markets: An Essay on the Economics of Imperfect Information | M. Rothschild and J. Stiglitz. Quarterly Journal of Economics, 90(4): 629-649, 1976. | No |
| On the Efficiency of Competitive Stock Markets where Trades have Diverse Information | S. Grossman. Journal of Finance, 31(2): 573-585, 1976. | No |
| Social Value of Public Information | S. Morris and H. Shin. American Economic Review, 92(5): 1521-1534, 2002. | No |
| A Simple Model of Herd Behavior | A. Banerjee. Quarterly Journal of Economics, 107(3): 797-817, 1992. | No |
| Continuous Auctions and Insider Trading | A. Kyle. Econometrica, 53(6): 1315-1335, 1985. | No |
| Predatory Trading | M. Brunnermeier and L. Pedersen. Journal of Finance, 60(4): 1825-1863, 2005. | No |
Lecture notes will be posted several days after each class. The following readings are optional.
| Component | Value |
|---|---|
| Nine homework assignments (due in lecture Thursdays) | 20% |
| Participation in in-class poll questions (every lecture) | 10% |
| Midterm 1 (Feb 8 in lecture) | 20% |
| Midterm 2 (March 14 in lecture) | 20% |
| Comprehensive final | 30% |
No assignment screening will be used in this course.
Students should be aware that this course contains the intellectual property of their instructor, TA, and/or the University of Waterloo.
Intellectual property includes items such as:
Course materials and the intellectual property contained therein, are used to enhance a student’s educational experience. However, sharing this intellectual property without the intellectual property owner’s permission is a violation of intellectual property rights. For this reason, it is necessary to ask the instructor, TA and/or the University of Waterloo for permission before uploading and sharing the intellectual property of others online (e.g., to an online repository).
Permission from an instructor, TA or the University is also necessary before sharing the intellectual property of others from completed courses with students taking the same/similar courses in subsequent terms/years. In many cases, instructors might be happy to allow distribution of certain materials. However, doing so without expressed permission is considered a violation of intellectual property rights.
Please alert the instructor if you become aware of intellectual property belonging to others (past or present) circulating, either through the student body or online. The intellectual property rights owner deserves to know (and may have already given their consent).
All deferred Final Exam requests for economics courses are administered by the Economics Undergraduate Office. Please consult the Deferred Exam Policy at
https://uwaterloo.ca/economics/undergraduate/resources-and-policies/deferred-final-exam-policy.
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Note for students with disabilities: AccessAbility Services, located in Needles Hall, Room 1401, collaborates with all academic departments to arrange appropriate accommodations for students with disabilities without compromising the academic integrity of the curriculum. If you require academic accommodations to lessen the impact of your disability, please register with AccessAbility Services at the beginning of each academic term.
Turnitin.com: Text matching software (Turnitin®) may be used to screen assignments in this course. Turnitin® is used to verify that all materials and sources in assignments are documented. Students' submissions are stored on a U.S. server, therefore students must be given an alternative (e.g., scaffolded assignment or annotated bibliography), if they are concerned about their privacy and/or security. Students will be given due notice, in the first week of the term and/or at the time assignment details are provided, about arrangements and alternatives for the use of Turnitin in this course.
It is the responsibility of the student to notify the instructor if they, in the first week of term or at the time assignment details are provided, wish to submit alternate assignment.