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".[1] 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".[2] The questions within financial economics are typically framed in terms of "time, uncertainty, options and information".[2]
- 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).
The subject is usually taught at a postgraduate level; see Master of Financial Economics.
Contents |
Subject matter
Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance.
It studies:
- Valuation - Determination of the fair value of an asset
- How risky is the asset? (identification of the asset appropriate discount rate)
- What cash flows will it produce? (discounting of relevant cash flows)
- How does the market price compare to similar assets? (relative valuation)
- Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation)
Financial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise the relationships.
Models in Financial economics
Financial economics is primarily concerned with building models to derive testable or policy implications from acceptable assumptions. Some fundamental ideas in financial economics are portfolio theory, the Capital Asset Pricing Model. Portfolio theory studies how investors should balance risk and return when investing in many assets or securities. The Capital Asset Pricing Model describes how markets should set the prices of assets in relation to how risky they are. The Modigliani-Miller Theorem describes conditions under which corporate financing decisions are irrelevant for value, and acts as a benchmark for evaluating the effects of factors outside the model that do affect value.
A common assumption is that financial decision makers act rationally (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.
See also
- List of economics topics
- List of economists
- List of finance topics
- List of master's degrees in financial economics
References
 |
This article includes a list of references or external links, but its sources remain unclear because it has insufficient inline citations. Please help to improve this article by introducing more precise citations where appropriate. (October 2009) |
- ^ "Robert C. Merton - Nobel Lecture" (PDF). http://nobelprize.org/nobel_prizes/economics/laureates/1997/merton-lecture.pdf. Retrieved 2009-08-06.
- ^ a b "Financial Economics". Stanford.edu. http://www.stanford.edu/~wfsharpe/mia/int/mia_int2.htm. Retrieved 2009-08-06.
External links
 |
This article's external links may not follow Wikipedia's content policies or guidelines. Please improve this article by removing excessive or inappropriate external links. (October 2009) |
Theory
- Foundations of Finance, Theory of Finance, Eugene Fama, University of Chicago Graduate School of Business
- Macro-Investment Analysis, Professor William Sharpe, Stanford Graduate School of Business
- Lecture Notes in Financial Economics, Antonio Mele, London School of Economics
- Great Moments in Financial Economics I, II, "III". Archived from the original on 2007-09-27. http://web.archive.org/web/20070927123024/http://www.in-the-money.com/artandpap/III+Short-Sales+and+Stock+Prices.doc.; IVa; "IVb". Archived from the original on 2007-09-27. http://web.archive.org/web/20070927123021/http://www.in-the-money.com/artandpap/IV+Fundamental+Theorem+-+Part+II.doc.. Prof. Mark Rubinstein, Haas School of Business
- Microfoundations of Financial Economics Prof. André Farber Solvay Business School
- Handbook of the Economics of Finance, G.M. Constantinides, M. Harris, R. M. Stulz
- Financial economics, International Encyclopedia of the Social & Behavioral Sciences, Oxford: Elsevier. 2001.
- Financial economics topics, The New Palgrave Dictionary of Economics
- An introduction to investment theory, Prof. William Goetzmann, Yale School of Management
- Notes on General Equilibrium Asset Pricing, Prof. Paulo Brito, ISEG, Technical University of Lisbon
Context and history
- Finance Theory, The History of Economic Thought Website, The New School
- The Scientific Evolution of Finance Prof. Don Chance, Prof. Pamela Peterson
- 50 Years of Finance Prof. André Farber, Université Libre de Bruxelles
- Great Ideas in Finance, riskmetrics.com
- "A Short History of Investment Forecasting". Archived from the original on 2007-10-12. http://web.archive.org/web/20071012112134/http://roundtable.informs.org/public-access/min061a.htm., Professor Michael Phillips, California State University, Northridge
- Pioneers of Finance, Prof. Larry Guin, Murray State University
- How Modern is Modern Portfolio Theory?, Peter L. Bernstein
Links and portals
- Financial Economics Links on WebEc
- JEL Classification Codes Guide
- Financial Economics Links on RFE
- SSRN Financial Economics Network
- "Books on Financial Economics": list on economicsnetwork.ac.uk
|
|||||
This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)
