This course provides an introduction to finance and the economic roles played by financial markets. Finance topics include asset pricing, capital budgeting, risk management, options and derivatives. Economic issues include the informational efficiency of financial markets; the impact of markets for time, risk and optionality on economic outcomes and risk; and policy responses to potential sources of economic inefficiency or fragility. While not a course on asset management, it will examine how developments in finance are impacting this industry.
The textbook for the course will be Ross, Westerfield, Jaffe & Jordan, Corporate Finance, 11th edition, 2016
All students are required to have successfully completed introductory microeconomics and macroeconomics (Econ 51 & 52 or the equivalent) and have ideally completed a course in statistics as well.
My office and office hours for the fall semester are as follows:
Fletcher 216 (909-607-3769)
Mondays (12:30-1:30), Tuesdays (4:00-5:00), Fridays (1:00-2:00) and by appointment.
Please join me for Economics Lunch on Fridays from 12:00 to 1:00pm. We are generally in the East Wing of McConnell Dining Hall.
Feel free to send me email at lyamane@pitzer.edu
or leave voicemail at the office 24 hours a day.
Week 1: Topics: Introduction & The Price of Time
Readings: Ross - Chapters 1 & 4,
Please also skim Ross Chapters 2 & 3
Week 2: Topics: Bonds and the Term Structure of Interest Rates
Readings: Ross - Chapter 8
Week 3: Topics: Stocks, Risk, and Statistics Overview
Readings: Ross - Chapters 9, 10, 11.1-3
Week 4: Topics: The Capital Asset Pricing Model and the Efficient Markets Hypothesis
Readings: Ross - Chapters 11, 14.1-4
Week 5: Topics: Empirical challenges to CAPM and EMH
Readings: Sections 4, 5.1-5.2 & 7 in “Understanding Asset Prices” (Scientific Background to) Nobel Prize in Economics (2013)
Week 6: Topic: The Arbitrage Pricing Theory
Readings: Ross - Chapter 12
Midterm: October 11
Week 7: Topics: Midterm Review & Behavioral Finance
Readings: Ross – Chapter 14.5-14.7,
Nicholas Barberis and Richard Thaler, “A Survey of Behavioral Finance” (from The Handbook of Economics of Finance 2003) – to skim and for reference
Section 6 in “Understanding Asset Prices, (Scientific Background to) 2013 Nobel Prize Citation,”
Andrew Lo, “Adaptive Markets and the New World Order” 2011
Week 8: Topics: Derivatives and Introduction to Options (No lecture on Oct. 23)
Readings: Ross – Chapters 25, 22.1-22.7
Week 9: Topics: Option Pricing & Optionality in Financial Markets and the Economy;
Readings: Ross – Chapters 22.8-22.11, 23.1, 24
Cox, Ross & Rubenstein “Option Pricing: A Simplified Approach”
Week 10: Topics: Capital Budgeting, Capital Structure
Readings: Ross - Chapters 5, 6, 7, 13, 23
Chapters 15, 16, 17, (18-skim), 30, 14.8, 20
Week 11: Topics: The Dividend Question; Mergers
Readings: Ross – Chapter 19, 29
Week 12: Topic: Adverse Selection & Moral Hazard in Insurance (no lecture on 11/24)
George Akerloff, “The Market for Lemons: Quality Uncertainty and the Market Mechanism, Quarterly Journal of Economics, 1970
Linda Blumberg, “Addressing Adverse Selection in Private Health Insurance Markets” Testimony to the Joint Economic Committee, Congress of the United States 2004
Linda Einav and Amy Finkelstein, “Moral Hazard in Health Insurance: What We Know and How We Know It” (December 2017)
Week 13: Topic The Principal-Agent Problem
Readings: John West, Vitali Kalesnik and Mark Clements, “How Not to Get Fired with Smart Beta Investing,” January, 2017
Sunit Shah, “The Principal-Agent Problem in Finance,” Literature Review, CFA Institute Research Foundation (2014)
B. Panda & N.M. Leepsa, “Agency theory: Review of Theory and Evidence on Problems and Perspectives,” Indian Journal of Corporate Governance (2017) - for review and reference
Week 14: Topics: Financial Fragility, International Finance
Readings: Ross: Chapter 31
Carmen Reinhart & Kenneth Rogoff “Is the 2007 Sub-Prime Financial Crisis So Different? An International Historical Comparison” NBER Working Paper 13761, January 2008
Carmen Reinhart & Kenneth Rogoff “The Aftermath of Financial Crises” American Economic Review Papers and Proceedings 2009
Jeremy Stein, “Securitization, Shadow Banking, and Financial Fragility” (2010)
Week 15: Summing Up
Final: Dec 17 at 2PM
| 1 | Have an understanding of and ability to discuss critically the efficient markets theory of financial markets and behavioral finance |
| 2 | Have an understanding at an introductory level of quantitative methods in finance |
| 3 | Have an understanding of risk aversion in the context of utility theory |
| 4 | Have an understanding and ability to discuss critically portfolio theory, the Capital Asset Pricing Model and multi-factor asset pricing models |
| 5 | Have the ability to apply the theory of bond pricing, duration and convexity |
| 6 | Have the ability to apply theories of the term structure of interest rates |
| 7 | Have the understanding of financial instability and crisis |
1. Keynes and Hayek rap
2. Glenn Hubbard and Bernanke
3. Fairness and Capuchin monkeys
4. Hari Kondabolu