Financial economics is the branch of economics Economics is the social science that is concerned with the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)". Current 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 Risk concerns the deviation of one or more results of one or more future events from their expected value. Technically, the value of those results may be positive or negative. However, general usage tends to focus only on potential harm that may arise from a future event, which may accrue either from incurring a cost or by failing to attain some): The amount of money to be transferred in the future is uncertain.
- options In finance, an option is a type of financial instrument classed as derivatives because they derive their value from an underlying asset. An option gives its holder the right, but not the obligation, to buy or to sell some asset on or before the option's expiration at an agreed price, the strike price: one party to the transaction can make a decision at a later time that will affect subsequent transfers of money.
- Information In game theory, a game is said to have perfect information if all players know all moves that have taken place: knowledge of the future can reduce, or possibly eliminate, the uncertainty associated with future monetary value Future value measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future assuming a certain interest rate, or more generally, rate of return; it is the present value multiplied by the accumulation function[citation needed] (FMV).
The subject is usually taught at a postgraduate level; see Master of Financial Economics A master’s degree in financial economics provides an understanding of theoretical finance and the underlying economic framework. The degree is postgraduate, and may incorporate a thesis or research component. Programs are often a joint offering by the business school and the economics department. See List of master's degrees in financial.
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Subject matter
Financial economics is the branch of economics Economics is the social science that is concerned with the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)". Current studying the interrelation of financial variables A variable is a symbol that stands for a value that may vary; the term usually occurs in opposition to constant, which is a symbol for a non-varying value, i.e. completely fixed or fixed in the context of use. The concepts of constants and variables are fundamental to all modern mathematics, science, engineering, and computer programming, such as prices In all modern economies, the overwhelming majority of prices are quoted in units of some form of currency. Although in theory, prices could be quoted as quantities of other goods or services this sort of barter exchange is rarely seen, interest rates An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real In economics, nominal value refers to any price or value expressed in money of the day, as opposed to real value, which adjusts for the effect of inflation. Changes in real value reflect only changes in the actual quantity, Q, of goods or services produced; whereas changes in the nominal value reflect the combined effect of changes in the quantity economic variables on financial ones, in contrast to pure finance.
It studies:
- Valuation Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects - Determination of the fair value of an asset
- How risky is the asset? (identification of the asset appropriate discount rate)
- What cash flows Cash flow refers to the movement of cash into or out of a business, a project, or a financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used 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 markets and instruments Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects
- Commodities - topics Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects
- Stocks - topics Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects
- Bonds - topics Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects
- Money market instruments- topics Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects
- Derivatives - topics Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects
- Financial institutions Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects and regulation Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects
Financial Econometrics People working in the finance industry often use econometric techniques in a range of activities. For example in support of portfolio management, risk management and in the analysis of securities. The sort of topics that financial econometricians are typically familiar with include: 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 In economics, a model is a theoretical construct that represents economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified framework designed to illustrate complex processes, often but not always using mathematical techniques. Frequently, economic models use to derive testable or policy implications from acceptable assumptions. Some fundamental ideas in financial economics are portfolio theory, the Capital Asset Pricing Model In finance, the capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic. 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 Homo economicus, or Economic human, is the concept in some economic theories of humans as rational and broadly self-interested actors who have the ability to make judgments towards their subjectively defined ends; efficient market hypothesis In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made). However, recently, researchers in experimental economics Experimental economics is the application of experimental methods to study economic questions. Experiments are used to test the validity of economic theories and test-bed new market mechanisms. Using cash-motivated subjects, economic experiments create real-world incentives to help us better understand why markets and other exchange systems work and experimental finance The goals of experimental finance are to establish different market settings and environments to observe experimentally and analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanism and returns processes. This can happen for instance by conducting trading simulations have challenged this assumption empirically The word empirical denotes information gained by means of observation, experience, or experiment. A central concept in science and the scientific method is that all evidence must be empirical, or empirically based, that is, dependent on evidence or consequences that are observable by the senses. It is usually differentiated from the philosophic. They are also challenged - theoretically In philosophy, theory refers to contemplation or speculation, as opposed to action, including "practice" (Greek praxis, πρᾶξις) actions done for their own sake, or actions done because instrumental to some other aim. "Theoria" is also a word still used in theological contexts - by behavioral finance Behavioral economics uses social, cognitive and emotional factors in understanding the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market prices, returns and the resource allocation, a discipline primarily concerned with the limits to rationality of economic agents.
Other common assumptions include market prices following a random walk A random walk, sometimes denoted RW, is a mathematical formalisation of a trajectory that consists of taking successive random steps. The results of random walk analysis have been applied to computer science, physics, ecology, economics, psychology and a number of other fields as a fundamental model for random processes in time. For example, the, or asset returns being normally distributed In probability theory and statistics, the normal distribution, or Gaussian distribution, is an absolutely continuous probability distribution with zero cumulants of all orders above two. The graph of the associated probability density function is “bell”-shaped, with peak at the mean, and is known as the Gaussian function or bell curve:[note 1]. Empirical evidence suggests that these assumptions may not hold, and in practice, traders and analysts, and particularly risk managers Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires, frequently modify the "standard models".
See also
| Book:Finance | |
| Books are collections of articles that can be downloaded or ordered in print. | |
- List of economics topics Behavioral · Cultural · Evolutionary
- List of economists This is an alphabetical list of notable economists, that is, experts in the social science of economics. There is also a separate list of politicians with economics training
- List of finance topics Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects
- 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 use of external links may not follow Wikipedia's policies or guidelines. Please improve this article by removing excessive and inappropriate external links or by converting links into footnote references. (October 2009) |
Theory
- Foundations of Finance, Theory of Finance, Eugene Fama Eugene Francis "Gene" Fama is an American economist, known for his work on portfolio theory and asset pricing, both theoretical and empirical. He is currently Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, University of Chicago Graduate School of Business
- Macro-Investment Analysis, Professor William Sharpe William Forsyth Sharpe is the STANCO 25 Professor of Finance, Emeritus at Stanford University's Graduate School of Business and the winner of the 1990 Nobel Memorial Prize in Economic Sciences, Stanford Graduate School of Business The Stanford Graduate School of Business is one of the professional schools of Stanford University, in Stanford, California. It is one of the leading business schools in the world
- Lecture Notes in Financial Economics, Antonio Mele, London School of Economics The London School of Economics and Political Science, commonly referred to as the London School of Economics, The LSE or simply LSE, is a specialist constituent college of the University of London in London, England. It is widely considered as one of the leading social science institutions in the world.[by whom?] Founded in 1895 by Fabian Society
- 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 The International Encyclopedia of the Social & Behavioral Sciences , edited by Neil J. Smelser and Paul B. Baltes, is a 26-volume work. It has some 4,000 signed articles, commissioned by around 50 subject editors, and includes 150 biographical entries, 122,400 entries, and an extensive hierarchical subject index. It is also available in online, Oxford: Elsevier, 2001.
- Financial economics topics with Abstracts, The New Palgrave Dictionary of Economics The New Palgrave Dictionary of Economics , 2nd Edition, is an eight-volume reference work, edited by Steven N. Durlauf and Lawrence E. Blume. It contains 5.8 million words and spans 7,680 pages with 1,872 articles. Included are 1057 new articles and, from earlier, 80 "classic" essays, 157 revised articles, and 550 edited articles. It is, 2008.
- An introduction to investment theory, Prof. William Goetzmann, Yale School of Management The Yale School of Management is the graduate business school of Yale University and is located on Hillhouse Avenue in New Haven, Connecticut, United States. The School offers M.B.A. and Ph.D. degree programs. As of January 2010, 417 students were enrolled in its Master of Business Administration program. The School has 97 faculty members (
- 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 New School is a university in New York City, located mostly in Greenwich Village. From its founding in 1919 and for most of its history, the university was known as the New School for Social Research. Between 1997 and 2005 it was known as New School University. The university and each of its colleges were re-branded to their current names in 20
- The Scientific Evolution of Finance Prof. Don Chance, Prof. Pamela Peterson
- 50 Years of Finance Prof. André Farber, Université Libre de Bruxelles The Université Libre de Bruxelles is a French-speaking university in Brussels, Belgium. It has about 20,000 students. It was ranked 54th worldwide in the THES 2004 but only 183rd in the THES 2008
- "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 California State University, Northridge is a public university in the San Fernando Valley, within the city limits of Los Angeles, California, USA. Part of the California State University system, CSUN was founded in 1958 as San Fernando Valley State College and adopted its current name in 1972 . It has become third largest university in California
- Pioneers of Finance, Prof. Larry Guin, Murray State University Murray State University, located in the town of Murray, Kentucky, is an approximately 10,000-student, four-year public university. Murray State maintains a strong academic reputation and has been rewarded with high marks when compared with other regional public universities in U.S. News & World Report and other college ranking publications
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
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Categories: Financial economics | Actuarial science
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Sun, 06 Jun 2010 13:07:52 GMT+00:00
Intelligent Energy Portal (blog) Another Energy Accounting term that parallels financial economics is Energy Internal Rate of Return (EIRR). EIRR is the annual return of energy as a ...
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Lina Abed E mail labed non Essex users should add essex ac uk Degree BSc Financial Economics Modules taken EC111 EC114 EC115
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Wed, 14 Jul 2010 14:12:01 GM
The Genesis Americans caused the crisis, by spending more than they save, the American government spending more than it made, American . financial. .
Q. Can this be done? Can this open doors for me in finance as well in other private and public institutions like Shell, BP, the UN, or the foreign service?
Asked by Frosty - Tue Jul 28 17:50:47 2009 - - 1 Answers - 0 Comments
A. Yes, you certainly can. An economics degree shows potential employers that you like to look at the big picture, and a finance minor will give you a bit of expertise instead of just having an economics degree. A plain old economics degree is a bit vague, so having a minor shows what area of economics you are most interested and would most like to pursue a career in. By the way, nearly every analyst job at the UN will require a masters degree, and I've heard that the foreign service exam can be very competitive. So study hard, and good luck!
Answered by Edward - Tue Jul 28 20:06:23 2009
