Financial economics


Financial economics

Financial economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment" [http://nobelprize.org/nobel_prizes/economics/laureates/1997/merton-lecture.pdf] .It is additionally characterised by its "concentration on monetary activities", in which "money of one type or another is likely to appear on "both sides" of a trade" [http://www.stanford.edu/~wfsharpe/mia/int/mia_int2.htm] . The questions within Financial economics are typically framed in terms of "time, uncertainty, options and information" [http://www.stanford.edu/~wfsharpe/mia/int/mia_int2.htm] .
* Time: money now is traded for money in the future.
* Uncertainty (or risk): The amount of money to be transferred in the future is uncertain.
* options: one party to the transaction can make a decision at a later time that will affect subsequent transfers of money.
* Information: knowledge of the future can reduce, or possibly eliminate, the uncertainty associated with future monetary value (FMV).

ubject matter

Given its scope, as above, financial economics tends to deal with the workings of financial markets, such as the stock market, and the financing of companies, and includes the following subject areas: Budgeting, saving, investing, borrowing, lending, insuring, hedging, diversifying, and asset management. Because the future is never known with certainty, a central concern of financial economics is the impact of uncertainty on resource allocation.

Financial economics thus attempts to answer questions such as:
* How are the prices of financial assets determined (stocks, bonds, currencies, commodities, and derivatives)?
* What are the effects of a company choosing different methods of financing its operations, such as issuing shares or borrowing?
* What portfolio of assets should an investor hold in order to best meet his/her objectives?

Financial Models

Financial economics is primarily concerned with building models to derive testable implications from acceptable assumptions. A common assumption is that financial decision makers act rational (see Homo economicus; Efficient market hypothesis). However, recently, researchers in Experimental economics and Experimental finance have challenged this assumption empirically. They are also challenged - theoretically - by Behavioral finance, a discipline primarily concerned with the limits to rationality of economic agents.

Other common assumptions include market prices following a random walk, or asset returns being normally distributed. Empirical evidence suggests that these assumptions may not hold, and in practice, traders and analysts, and particularly risk managers, frequently modify the "standard models".

While in economics models are mainly employed to judge social welfare, financial economists are more concerned with empirical predictions.

Important concepts

*Risk-free interest rate
*Time value of money
*Fisher separation theorem
*Modigliani-Miller theorem
*Arbitrage
*Rational pricing
*Efficient market theory
*Modern portfolio theory
*Yield curve
*Homo economicus
*Arrow-Debreu model

Finance journals

*Journal of Finance
*Review of Financial Studies
*Journal of Financial Economics
*Econometrica
*Financial Analysts Journal
*Journal of Investment Management

See also

*Finance
*Value investing
*Financial mathematics
*Financial engineering
*Financialization
*Mathematical economics
*Model (economics)
*Experimental economics
*Experimental finance
*Behavioral finance
*Bank of Sweden Prize in Economic Sciences

*lists
**List of Economics Topics
**List of Finance Topics
**List of Economists

External links and references

Theory
* [http://faculty.chicagogsb.edu/eugene.fama/research/index.htm Foundations of Finance] , [http://faculty.chicagogsb.edu/eugene.fama/research/index.htm Theory of Finance] , Eugene Fama, University of Chicago Graduate School of Business

* [http://www.stanford.edu/~wfsharpe/mia/int/mia_int2.htm Macro-Investment Analysis] , Professor William Sharpe, Stanford Graduate School of Business

* [http://fmg.lse.ac.uk/~antonio/files/fin_eco.pdf Lecture Notes in Financial Economics] , Antonio Mele, London School of Economics

* [http://www.in-the-money.com/artandpap/I%20Present%20Value.doc Great Moments in Financial Economics I] , [http://www.in-the-money.com/artandpap/II%20Modigliani-Miller%20Theorem.doc II] , [http://www.in-the-money.com/artandpap/III%20Short-Sales%20and%20Stock%20Prices.doc III] ; [http://www.in-the-money.com/artandpap/IV%20Fundamental%20Theorem%20-%20Part%20I.doc IVa] ; [http://www.in-the-money.com/artandpap/IV%20Fundamental%20Theorem%20-%20Part%20II.doc IVb] . Prof. Mark Rubinstein, Haas School of Business

* [http://www.ulb.ac.be/cours/solvay/farber/PhD.htm Microfoundations of Financial Economics] Prof. André Farber Solvay Business School

* [http://ideas.repec.org/b/eee/finhes/2.html#related Handbook of the Economics of Finance] , G.M. Constantinides, M. Harris, R. M. Stulz

* [http://www.sciencedirect.com/science?_ob=RefWorkIndexURL&_idxType=SC&_cdi=23486&_refWorkId=21&_explode=151000131,151000133&_alpha=&_acct=C000050221&_version=1&_userid=10&md5=f2c773b745753022e1cccc9a38d83508&refID=151000133#151000133 Financial economics] ", International Encyclopedia of the Social & Behavioral Sciences", Oxford: Elsevier. 2001.

* [http://www.dictionaryofeconomics.com/articles_by_topic?topicid=G Financial economics topics] , The New Palgrave Dictionary of Economics

* [http://viking.som.yale.edu/will/web_pages/will/finman540/classnotes/notes.html An introduction to investment theory] , Prof. William Goetzmann, Yale School of Management

Context and history
* [http://cepa.newschool.edu/het/schools/finance.htm Finance Theory] , The History of Economic Thought Website, The New School

* [http://www.finance-and-physics.org/Library/Articles3/scienceandfinance/science.htm The Scientific Evolution of Finance] Prof. Don Chance, Prof. Pamela Peterson

* [http://education.riskmetrics.com/wiki/index.php?title=Great_Ideas_in_Finance Great Ideas in Finance] , riskmetrics.com

* [http://roundtable.informs.org/public-access/min061a.htm A Short History of Investment Forecasting] , Professor Michael Phillips, California State University, Northridge

* [http://campus.murraystate.edu/academic/faculty/larry.guin/FinancialHistory.htm Pioneers of Finance] , Prof. Larry Guin, Murray State University

* [http://www.fame.ch/library/EN/RP_Bernstein.pdf How Modern is Modern Portfolio Theory?] , Peter L. Bernstein

Links and portals
* [http://www.helsinki.fi/WebEc/webecg.html Financial Economics Links on WebEc]

* [http://www.inomics.com/cgi/econdir?path=Science/Social_Sciences/Economics/Financial_Economics Financial Economics Links on inomics]

* [http://rfe.org/showCat.php?cat_id=56 Financial Economics Links on RFE]

* [http://www.ssrn.com/fen/index.html SSRN Financial Economics Network]

Education

Master's degrees in financial economics are often a joint offering by the business school and the economics department.


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