Lectures on Financial Economics


Download (> 800 pages)  — Last update: December 21st, 2016

This book manuscript is based on notes I wrote in support of advanced undergraduate and graduate lectures in financial economics, macroeconomic dynamics, financial econometrics and financial engineering.

Part I, “Foundations,” develops the fundamentals tools of analysis used in Part II and Part III. These tools span such disparate topics as classical portfolio selection, dynamic consumption- and production- based asset pricing, in both discrete and continuous-time, the intricacies underlying incomplete markets and other market imperfections and, finally, econometric tools comprising maximum likelihood, methods of moments, and the relatively more modern simulation-based inference methods.

Part II, “Applied asset pricing theory,” is about identifying the main empirical facts in finance and the challenges they pose to financial economists: from excess price volatility and countercyclical stock market volatility, to cross-sectional puzzles such as the value premium. This second part reviews the main models aiming to take these puzzles on board.

Part III, “Asset pricing and reality,” aims just to this: to use the main tools in Part I and the lessons drawn from Part II, so as to cope with the main challenges occurring in actual capital markets, arising from option pricing and trading, interest rate modeling and credit risk and their associated derivatives. In a sense, Part II is about the big puzzles we face in fundamental research, while Part III is about how to live within our current and certainly unsatisfactory paradigms, so as to cope with demand for intellectual expertise.

These notes are still underground. Economic motivation and intuition are not always developed as they would deserve, some derivations are inelegant, and sometimes, the English is a bit informal. Moreover, I still have to include material on monetary models of asset prices, theories of the nominal and the real term structure of interest rates, bubbles, asset prices implications of overlapping generations models, or financial frictions and their interconnections with business cycle developments. Finally, I need to include more extensive surveys for each topic I cover, especially in Chapters 1, 3, 5, 6, and 10. Of the 13 Chapters I have already drafted, Chapters 1 and 6 are those in need of the most serious revamp. I plan to revise these notes to fill all these gaps. Meanwhile, any comments on this version are more than welcome.