FM305      Half Unit
Advanced Financial Economics

This information is for the 2025/26 session.

Course Convenor

Prof Dimitri Vayanos

Availability

This course is compulsory on the BSc in Finance. This course is not available as an outside option to students on other programmes. This course is not available to General Course students.

This course does not permit auditing students.

Requisites

Pre-requisites:

Students must have completed FM200 and FM214 and FM215 before taking this course.

Course content

This course will present modern theories of financial markets and asset valuation. 


The first part of the course, taught over Weeks 1-5 of Autumn Term, focuses on frictionless asset markets. It starts with mean-variance portfolio choice and the CAPM. It then moves to expected utility, risk aversion and static portfolio choice. It then derives implications of absence of arbitrage for asset prices, and introduces the concepts of stochastic discount factor (SDF), risk-neutral probability (RNP), and market completeness. It then derives the consumption CAPM and the equity premium puzzle. It then extends portfolio choice, SDF, RNP, market completeness, pricing by arbitrage, and the consumption CAPM to dynamic settings. It finally extends the same concepts to continuous time, introducing in this process methodologies of continuous-time Finance, such as stochastic calculus and Ito's Lemma. 


The second part of the course, taught over Weeks 7-11 of Autumn Term, focuses on asset markets with frictions. It covers limits of arbitrage stemming from frictions such as asymmetric information, costs of market participation, search costs, short-sale costs, and costs of raising external capital. It provides motivating evidence for the frictions and their asset-pricing effects, and develops models of the frictions and their effects. It finally covers the pricing of fixed-income securities, and shows how limits of arbitrage enter into that pricing.

Teaching

33 hours of seminars in the Autumn Term.

This course is taught in the interactive lecturing format. There is no distinction between lectures and classes/seminars; there are “sessions” only, and the pedagogical approach in each session is interactive.

Indicative reading

Teaching notes will be provided. 

Assessment

Continuous assessment (100%)


Key facts

Department: Finance

Course Study Period: Autumn Term

Unit value: Half unit

FHEQ Level: Level 6

CEFR Level: Null

Total students 2024/25: 72

Average class size 2024/25: 72

Capped 2024/25: No
Guidelines for interpreting course guide information

Course selection videos

Some departments have produced short videos to introduce their courses. Please refer to the course selection videos index page for further information.

Personal development skills

  • Problem solving
  • Application of information skills
  • Application of numeracy skills
  • Commercial awareness