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Microeconomics (for Finance)
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.
– 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).
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),
J. MONTIER (JM), Behavioural Investing. A Practitioner’s Guide To Apply Behavioural Finance, John
Wiley & Sons, 2007.
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.
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).
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
Regular class attendance and active participation in the course are definitely
webpage, or on the Faculty notice board.