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Microeconomics (for Finance) PROF. FERDINANDO COLOMBO; PROF. GIOVANNI URSINO COURSE AIMS The course makes use of the results of microeconomic theory to provide students with a thorough understanding of the theoretical foundations of financial economics. The final part of the course will look at some psychological factors that may cause investors to make irrational choices. COURSE CONTENT – Risk and uncertainty. Regulatory and positive validity of the theory of expected utility. (VZ 1-19, 24-39). – Uncertainty and beliefs. a priori probability, acquisition of information and updating of beliefs. Imitation and information cascades. (VZ 41-55; RM 1-18, 25-27, 37-38; BS 279-293). – Risk and return. expected value, equivalent of certainty, risk premium and probability premium. Absolute and relative risk aversion. Stochastic dominance. Average-variance approach. Risk-return trade-off. (VZ 39, 19-24, 65-87; DD 35-38, 57-73, 96-98). – Investment, insurance and savings decisions: correlation between assets and benefits of diversification; portfolio selection in the presence risk-free securities. Efficient risk distribution and insurance contracts. Investment selection and consumption smoothing (DD 75-91). – Competitive equilibrium and prices of securities: sovereign risk assets. Arrow's securities, efficiency and absence of arbitrage possibilities. Incomplete markets, arbitrage and inefficient distribution of risk. Financial intermediation and funds management: origins, growth and possible crisis of a banking system. The additive theorem of value. Options and complete markets. (DD 145-156, 195199, 204-210; AG 58-76). – Behavioural finance. Psychological factors that influence the behaviour of investors in financial markets. (BT 1053-1073, 1099-1104; KR 52-65; JM 1736, 63-94). READING LIST T. VAN ZANDT (VZ), Introduction to the Economics of Uncertainty and Information, 2006. R.B. MYERSON (RM), Probability Models for Economic Decisions, Thomson Brooks/Cole, 2005. S. BIKHCHANDANI-S. SHARMA (BS), Herd Behavior in Financial Markets, IMF Staff Papers, 2001. J.P. DANTHINE-J.B. DONALDSON (DD), Intermediate Financial Theory, Elsevier, Amsterdam, 2005. F. ALLEN-D. GALE (AG), Understanding Financial Crises, Oxford University Press, Oxford, 2007. N. BARBERIS-R. THALER (BT), A Survey of Behavioral Finance, in Constandinides et al, Handbook of the Economics of Finance, Vol. 1, Part 2, Elsevier, Amsterdam, 1052-1090, 2003. D. KAHNEMAN-M.K. RIEPE (KR), Aspects of Investor Psychology, Journal of Portfolio Manager, 24(4), 1998. J. MONTIER (JM), Behavioural Investing. A Practitioner’s Guide To Apply Behavioural Finance, John Wiley & Sons, 2007. TEACHING METHOD Lectures and assignments in class (lecture hall and computer lab). The following software will be used during the course: Microsoft Excel and add-in Simtools. ASSESSMENT METHOD Written, with questions about theory and numerical exercises. A IT-related exercise in the computer lab to test the student's capacity to use Excel and Simtools for solving economic-statistical-financial problems. Students may take the exam in the form of an interim test (during the seventh week of the course) and a final exam (taken during the first or second official examination date ('appelli') in January/February 2016). NOTES The course contemplates extensive use of the economic, mathematical and statistical concepts studied in the Economics I, General Math, and Statistics I courses for the threeyear degree programme. It is assumed that students enrolling in this course: are familiar with the basic rules of algebra, know how to calculate derivatives of polynomial and log rhythmic functions,; are able to identify the maximum and the minimum of a function of a variable; are familiar with the concepts of probability, conditioned probability, the Bayes rule, variance, covariance, coefficient of correlation. Instead, familiarity with Microsoft Excel is not required. Several documents will be posted on the Blackboard to facilitate preparation for the exam. Regular class attendance and active participation in the course are definitely recommended. Further information can be found on the lecturer's webpage http://www2.unicatt.it/unicattolica/docenti/index.html, or on the Faculty notice board. at