Financial Economics

This module offers a comprehensive overview of financial markets from an economic perspective. Many classical asset pricing models, such as CAPM and APT, take a myopic view of investing considering one period ahead. This module presents models that can handle asset dynamics and volatility over time. Mainstream finance also assumes that people are rational and is mainly concerned with how they should behave when making financial decisions. This module first discusses from a theoretical viewpoint the market efficiency hypothesis and shows empirical evidence for and against this hypothesis. Then, it focuses on how individuals make financial decisions in practice and use insights from psychology and behavioral economics to explain why they systematically deviate from normative financial theory and make predictable errors. The cognitive, emotional, and social biases that influence people's decisions bear important implications for individual investors, financial managers, and the dynamics of financial markets. Next, it discusses information asymmetry and agency theory that play a key role in corporate finance and have their roots un the information economics literature (e.g. signaling project quality with investment, debt, dividend, stock split with also some examples of crowdfunding applications).
The following is an indicative list of the key topics that will be discussed:

· Modelling Asset price dynamics.
· Market efficiency theory.
· Expected Utility Theory & Prospect Theory.
· Disposition effect.
· Noise trader risk in financial markets and limits of arbitrage.
· Cognitive biases (e.g. mental accounting).
· Emotional biases (e.g. pride and regret).
· Social biases (e.g. herding).
· Asymmetric information and agency theory in corporate finance.
· Case studies.
Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:
· modeling asset price dynamics: main aspects and applications.
· how behavioral biases affect decision making involving risk.
· how self-deception, heuristics, emotional biases, and social biases influence investor behavior and asset pricing.
· theoretical and empirical evidence underpinning a variety of investment strategies based on the assumption of inefficient markets.
· the history and evolution of behavioral Finance.
· behavioral anomalies for market anomalies/puzzles.
· behavioral corporate finance.
· main issues of information asymmetry and agency theory in corporate finance and crowdfunding: theory and applications.