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Microeconomics (for Finance)
The course makes use of the findings of microeconomic theory and of the calculus
of probabilities in order to provide students with an in-depth understanding of the
fundamentals of modern financial economics.
– Risk and uncertainty. von Neumann-Morgenstern and Savage theorems. Debate
about the validity of the theory of expected utility as a rule. (VZ 1-19, 24-39).
Uncertainty and beliefs. a priori probability, acquisition of information and
Bayes theorem: theory and numeric simulations. 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. Coefficients of absolute and relative risk aversion.
Stochastic dominance. Average-variance approach:
criticisms and
justifications. Risk-return trade-off. (VZ 39, 19-24, 65-87; DD 35-38, 57-73,
– Investment, insurance and savings decisions: portfolio selection in the presence
of risk and risk-free securities with respect to an individual's wealth and risk
aversion. Investment selection and consumption smoothing (DD 75-91).
– Competitive equilibrium and prices of securities: sovereign risk assets,
competitive equilibrium and efficient distribution of risk. Complete markets,
prices of securities and absence of arbitrage possibilities. Incomplete markets
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: criticism of the Bayes, von Neumann-Morgenstern and
Savage theorems from the positive point of view. Psychological factors that
prompt investors not to update the credentials in Bayesian mode and not to
make portfolio choices on the basis of preferences about their wealth. (BT
1053-1073, 1099-1104; KR 52-65; JM 17-36, 63-94).
T. VAN ZANDT, Introduction to the Economics of Uncertainty and Information, 2006.
R.B. MYERSON, Probability Models for Economic Decisions, Thomson Brooks/Cole, 2005.
S. BIKHCHANDANI-S. SHARMA, Herd Behavior in Financial Markets, IMF Staff Papers, 2001.
J.P. DANTHINE-J.B. DONALDSON, Intermediate Financial Theory, Elsevier, Amsterdam, 2005.
F. ALLEN-D. GALE, Understanding Financial Crises, Oxford University Press, Oxford, 2007.
N. BARBERIS-R. THALER,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, Aspects of Investor Psychology, Journal of Portfolio Manager, 24(4),
J. MONTIER, Behavioural Investing. A Practitioner’s Guide To Apply Behavioural Finance, John
Wiley & Sons, 2007.
Lectures, assignments in class, and periodic homework. 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 tests the student's capacity to use Excel and Simtools for solving
economic-statistical-financial problems.
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. 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, or on the Faculty notice board.