Download The course presents an introduction to financial intermediation and

1. Curricular Unit
Institutional Finance
2. Course Instructor
Paolo Colla
3. Learning Objectives
The course presents an introduction to financial intermediation and the organization of trading and aims at investigating the following aspects: 1) what are banks and what do they do? 2) what are the motives for trading and how is the trading process organized? 3) how do traders (and protocols) affect market quality? The analysis of these issues will be conducted at three different levels: institutional, theoretical, and empirical. It is expected that a student who successfully completes this unit will be able to understand and identify the architecture of the banking and trading industry, its ends, motives, and participants. He or she should also understand the theoretical models that analyse banking and trading, as well as the empirical results obtained in recent relevant empirical studies. Finally, a student should be bale to deal with real data from trading. 4. Course Syllabus
1 Traditional and institutional finance 2 Asymmetric information on the liability-­‐‑side: Liquidity risk and bank runs 3 Asymmetric information on the asset-­‐‑side: Credit risk and monitoring 4 Other risks: Interest rate and off-­‐‑balance sheet risk 5 Outlook on the trading industry/1: Trading mechanisms 6 Outlook on the trading industry/2: Order submission and execution 7 A first look at bid, ask and transaction prices 8 Dealers and inventory/1: Theory 9 Dealers and inventory/2: Evidence 10 Limit order book/1: Theory 11 Limit order book/2: Evidence 12 Asymmetric information and market efficiency 13 Dealers and asymmetric information: Theory 14 Dealers and asymmetric information: Evidence 15 Strategic trading and price impact 16 Algorithmic trading 17 Asymmetric information and performance evaluation 5. Coherence between course syllabus and learning objectoves of the curricular unit
The course takes the move from the institutional level, and describes the banking and trading industry with special focus on: role of banks and stability of the banking system, market structures (trading sessions and execution systems), order properties (market, limit and stop orders), and market participants (retail investors, brokers, dealers, arbitrageurs and gamblers). Given the complexity of real-­‐‑world trading environments, we’ll investigate these aspects by means of theoretical models that simplify the analysis along several dimensions. We’ll start introducing the traditional banking model which highlights the role financial intermediaries have in insuring borrowers. We will then move to the trading industry and firstly analyse liquidity provision as a trading motive within both dealer markets (inventory models) and the limit order book. Then, we’ll introduce asymmetric information in a standard finance model, and study its impact on market quality both in (competitive and strategic) batch and dealer markets. After developing each model, we’ll review the methodology to test its predictions and discuss the empirical evidence. Further topics are discussed in the last unit of the course. By following this structure students will get structured and in-­‐‑depth knowledge of institutional finance both from a theoretical and empirical perspective. 6. Teaching Method
The analysis of the various topics will be conducted at three different levels: institutional, theoretical, and empirical. After developing each model, we’ll review the methodology to test its predictions and discuss the empirical evidence. For different parts of the course students will work on assignments. Assignments will typically include empirical analyses of financial data, such as stock prices, volumes and quotes. Working knowledge of Excel is assumed as a pre-­‐‑requisite. 7. Coherence between teaching method and learning objectives
The course presents an introduction to financial intermediation and the organization of trading and aims at investigating the following aspects: 1) what are banks and what do they do? 2) what are the motives for trading and how is the trading process organized? 3) how do traders (and protocols) affect market quality? The analysis of these issues will be conducted at three different levels: institutional, theoretical, and empirical. The course takes the move from the institutional level, and describes the banking and trading industry with special focus on: role of banks and stability of the banking system, market structures (trading sessions and execution systems), order properties (market, limit and stop orders), and market participants (retail investors, brokers, dealers, arbitrageurs and gamblers). Given the complexity of real-­‐‑world trading environments, we’ll investigate these aspects by means of theoretical models that simplify the analysis along several dimensions. We’ll start introducing the traditional banking model which highlights the role financial intermediaries have in insuring borrowers. We will then move to the trading industry and firstly analyse liquidity provision as a trading motive within both dealer markets (inventory models) and the limit order book. Then, we’ll introduce asymmetric information in a standard finance model, and study its impact on market quality both in (competitive and strategic) batch and dealer markets. After developing each model, we’ll review the methodology to test its predictions and discuss the empirical evidence. Further topics are discussed in the last unit of the course. By following this structure students will get structured and in-­‐‑depth knowledge of institutional finance both from a theoretical and empirical perspective. For different parts of the course students will work on assignments. Assignments will typically include empirical analyses of financial data, such as stock prices, volumes and quotes. Working knowledge of Excel is assumed as a pre-­‐‑requisite. 8. Main Bibliography
We will make use of material from the following books: [dJR] F. de Jong and B. Rindi, The Microstructure of Financial Markets, Cambridge University Press, 2009 [FR] X. Freixas and J.-­‐‑C. Rochet, Microeconomics of Banking, MIT Press, 2008 [GT] S.I. Greenbaum and A.V. Thakor, Contemporary financial intermediation, Elsevier, 2007 [Har] L. Harris, Trading and Exchanges: Market Microstructure for Practitioners, Oxford University Press, 2003 [Has] J. Hasbrouck, Empirical Market Microstructure, Oxford University Press, 2007 FR] contains rigorous treatment of theoretical banking models, while [GT] gives a broader overview of financial intermediaries dispensing of the theory underpinnings; [dJR] provides in-­‐‑depth coverage of theoretical market microstructure models, [Has] focuses on the empirical analysis of microstructure data, while [Har] adopts a more descriptive perspective on the complex world of trading.