The aim of the course is to give an introduction to financial markets and asset pricing. The first part of the course explores the idea of arbitrage both in a world with certainty and uncertainty. Arbitrage pricing is approached at general level, but the course also contains particular aplications to bonds, stocks and derivative markets. The second part of the course concentrates on equilibrium models of asset pricing. It includes a revision of equilibrium models under certainty, mean variance analysis and Capital Asset Pricing Model (CAPM). The concept of complete markets is also explored as the link of both parts of the course.
I INTRODUCTION
1 Financial Economics, Instruments and Markets.
- Introduction
- Basic concepts
- Financial intermediation
- Financial Markets
- Annalytical treatment of the rest of the course
II INTRODUCTION TO FINANCIAL THEORY
II.I ABSENCE OF ARBITRAGE AND VALUATION
- Arbitrage in a riskless fixed income market
- Basic ideas on the absence of arbitage concept
- Fixed income valuation under absence of arbitrage
- Sequential Arbitrage
- The term structure of interest rates
- Term structure and yield to maturity
- Interest rates and bond prices
- Strips
- Arrow Debreu assets and the fundamental equation of valuation
- Contingent asset valuation, main ideas
- The State-Time preference model, Arrow Debreu assets and the fundamental equation of valuation
- Valuation, arbitrage and risk neutral probabilities
- Put and Call options
- Futures
- Binomial valuation of zero coupon bonds
II II PREFERENCES AND EQUILIBRIUM
- The general representation od preferences uneer certainty
- Introduction
- Rationality axioms
- Ordinal utility functions
- The decission problem of a rational agent
- Expected utility theory and risk aversion
- Introduction
- Axioms and expected utility theorem
- Coments on expected utility representations
- Some criticisms to the Von Neuman-Morgenstern expected utility theory
- Risk aversion: A brief conceptual discussion
- Formal measures of risk aversion
- Comparative statics in optimal portfolios
- Frequently used utility functions
- A special case, mena variance analysis
- Financial Equilibrium
- Portfolio selection and mean variance analysis
- Formal justification
- Diverification and risk measurement
- Efficient protfolio construsction
- Beta as risk contribution to the risk of a portfolio
- Optimal portfolios in the pressence of restrictions
- Valuation of assets in equilibrium the CAPM
- Assumptions
- Traditional model without risk
- The CAPM
- Evaluation of the assumptions
III TOPICS
- Portfolio management in practice
- Active and passive management
- Market neutral funds
- Predictability and sincronization
- Evaluation: Sharpe´s ratio and Alpha
- Institutional aspects and market microstructure
- Fixed income markets
- Shares markets
- Derivatives
- Microstructure and price formation
References
MARÍN, J.; RUBIO, G. Economía financiera. Barcelona: Antoni Bosch, 2001.
Additional Refferences
Secction II
ALLEN, F.; GALE, D. Financial Innovation and risk sharing. Cambrigde: MIT Press, 1994. BREALEY, R.; MYERS, S. Fundamentos de financiación empresarial. Madrid: McGraw-Hill, 1992. COPELAND, T.; WESTON, F. Financial Theory and Corporate Policy. Reading (Mass.): Addison-Wesley, 1992.
ELTON, E.; GRUBER, M. Modern Portfolio Theory and Investment Analysis. 5a. ed. Nova York NY): Wiley and sons, 1995.
INGERSOLL, J. Theory of Financial Decision Making. Totowa (N. J.): Rowan & Littlefield, 1987.
Section III
EZQUIAGA, I. El mercado español de deuda del Estado: estructura y formación de precios. Barcelona: Ariel, (Ariel Economía), 1991.
FREIXAS, X. Futuros financieros. Madrid: Alianza Editorial, 1990.
HULL, J. C. Options, Futures and other Derivative Securities. Englewood Cliffs (NJ): Prentice-Hall, 1993.
KOLB, R. Understanding Futures Markets. 3a. ed. Miami (FL): Kolb Publishing Company, 1991.
STIGUM, M. The Money Market. 3a ed. Richard D. Irwin, INC, 1990.