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 lenses of economic concepts. Major financial instruments such as bonds, stocks, futures, and options are introduced under economic equilibrium context, and we 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. In turn, we discuss how trade is beneficial for all the participants in the market. We conclude the course with an introduction to modern portfolio theory.