Handbook

The valuation of financial assets is a cornerstone of real-world financial markets. The economic theory of financial markets provides a logical foundation for modern asset pricing and portfolio choice theories.

This course provides economic insights into finance and financial markets. We study equilibrium valuation and pricing through the concept of the "arbitrage-free environment". Then, we introduce major financial instruments such as bonds, stocks, futures, and options and discuss techniques to value these diverse financial assets. We then turn to the "utility-based" approach, wherein a well-defined utility structure is established as a model primitive. Maximising expected utility, we derive optimal consumption, equilibrium trades and prices. We then discuss how trade is beneficial for all the participants in the market. We conclude the course with an introduction to modern portfolio theory.