Download Department of Economics

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University of Texas, Permian Basin
T, Th, 12.30-1.45pm
Spring 2016
Economics
Scott Carson
Economics 4334.001.2162– Financial Economics
In October 2008, I sat in Paul Hodges’ office and were amazed with how fast the US
economy seemed to be unravel. It was a dreary, overcast day that mirrored what was
happening in the World. Lehman was bankrupt. American International Group (AIG)
was on the ropes. Fannie and Freddie were rumored to be in trouble. The Treasury and
Eurodollar (TED) spread had widened considerably, and it looked as though the US and
World economies may be heading for a second Great Depression, where Gross Domestic
Product (GDP) declined by one third and unemployment reached 25 percent. I had
former students as far away as Tennessee and the Rocky Mountains emailing and calling
me to ask what was next. Were we heading for the next economic Big One? Having a
Ph.D. in economics with an emphasis in finance and having research in economic history,
I quickly responded we were nowhere close to the next Great Depression.
This course tries to make sense of these considerable economic changes against what it
means to the individual and firm’s allocation over their financial assets. We consider
financial assets and institutions. The course emphasizes modern asset valuation theory
and the role of financial intermediaries and their regulation in the financial system.
COURSE LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
The student gains a working knowledge of the investment and trading environment.
Students learn the importance of diversification, portfolio theory, and its practice.
Students use portfolio theory and learn modern capital asset pricing.
Students learn the fundamentals of debt markets.
Using time value, students learn equity valuation models.
Students learn modern option pricing theory.
Grading
You are graded on your performance relative to the class in four areas.
1. Problem sets, (100 Points, 5 assignments at 20 points each). Subject to change.
2. Mid-Term Exam (100 Points)
3. Comprehensive Final (200 Points)
Office Hours
T, TH, 2-3pm
Prerequisite
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Economics 2301 and 2302. If you have not had these courses, please see me.
Required Textbooks
Bodie, Kane, and Marcus. Investments. Any edition later than the 5th.
Malkiel, Burton G. A Random Walk Down Wall Street. Any version.
I accept your use of any of the last three editions of this book, but you are responsible to
make sure to keep up with the readings and to answer the correct problem set questions
from the book.
Course Notes
Some instructors provide their course with pre-written notes. As one interested in
memory, comprehension, and retention, I believe the best way to retain material covered
in class is for students to write it themselves. Therefore, I do not provide pre-written
notes because you retain material better when you write it down.
Grading
Grades are assigned according to your point accumulation relative to the class high. Grades are
assigned according to the following scale:
Grade
A
AB+
B
BC+
C
CD+
D
DE
Percent
93%
90%
87%
84%
81%
78%
75%
70%
67%
64%
60%
Below 60%
POLICY ON SCHOLASTIC DISHONESTY:
When legal code is necessary to maintain academic honesty and social interaction, social
bounds of reciprocity are eliminated. Ergo, it is expected that the highest forms of
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honesty and respect for others be adhered too. Outside of that, the University expects a
student to maintain a high standard of individual honor in all scholastic work.
STUDENT CLASSROOM CONDUCT:
Be nice. Failure to be cool with me, the instructor, or other students may adversely affect
your grade. If you sometimes feel like you're stepping over the lines of social decorum,
you probably are, so step back and reevaluate, because it may detract from our classroom
environment. Other than that, let's just hang out and learn as much as we can this
semester.
Electronic Device Policy
Computers are essential in modern research and economics. However, they can also be a
tremendous distraction. So, unless there is an issue with a physical or other disability,
laptops are not allowed during lectures. Tablet PCs and Ipads are also not allowed.
The use of other electronic devices, such as cell phones and text massagers, are strictly
prohibited. Please do not even bring them to class. Moreover, please do not distract
class by turning your phone to vibrate and then walking out to take a call. Take all calls
before or after class. Nothing good is going on when a student is doing things with their
hands under their desk. So, outside of the limited use of laptop computers, do not bring
electronic devices to class and do not leave the class to use them.
Outline
Macroeconomics
Chapter 17
Macroeconomic and Industry Analysis
Introduction of Financial Economics
Chapter 1
The Investment Environment
Chapter 2
Asset Classes and Financial Instruments
Chapter 3
How Securities are Traded
Portfolio Theory and Practice
Chapter 5
Introduction to Risk, Return, and the Historical
Record
Chapter 6
Risk Aversion and Capital Allocation
To Risky Assets
Chapter 7
Optimal Risky Assets
Equilibrium in Capital Markets
Chapter 9
The Capital Asset Pricing Model
Midterm
Chapter 10
Arbitrage Pricing Theory and Multifactor
Chapter 11
The Efficient Market Hypothesis
Models of Risk and Return
Chapter 12
Behavioral Finance and Technical Analysis
Chapter 13
Empirical Evidence on Security Returns
Fixed Income Securities
548-582
1-27
28-58
59-91
117-159
160-195
196-245
280-317
318-342
343-380
381-406
407-438
4
Chapter 14
Bond Prices and Yields
Chapter 15
The Term Structure of Interest Rates
Security Analysis
Chapter 18
Equity Valuation Models
Options, Futures, and Other Derivatives
Chapter 20
Options Markets: Introduction
Chapter 21
Option Valuation
Chapter 22
Futures Markets
Final
439-479
480-507
583-626
667-710
711-754
755-783
This is a tentative syllabus and outline. I reserve the right to make changes. However, all
changes will be announced in class. If you miss a day, you are responsible to be informed of
any changes to this syllabus.