Theory of Finance
- The basic objective of this foundation course in finance is to summarize the fundamental theoretical aspects of finance relevant to the future study of finance and application within the scope of your master’s degree.
- To know: Patterns of functioning and development trends of the national and global financial system: fiscal, budgetary system, public finance, financial market; Main results of the latest research in the field of finance theory; Differences between the major segments of the financial markets; Efficient market hypothesis; Types of financial intermediaries and their functions; Principles that determine the efficiency of financial operations.
- To be able to: Identify key issues of information efficiency of financial markets; Highlight the features of the functioning of financial markets in economies in transition are not clearly fixed the rights of private property; Understand the essence of the changes taking place in the financial markets; Assess the factors affecting the stability of emerging economies; Evaluate the causes of financial crises in developing countries.
- To acquire skills in: Possession of the procedure and methodology of scientific research in the professional field; Skills of independent research work; Analysis of the specific situation on the financial markets, budgetary, fiscal system, public finance.
- Topic 1. Introduction and history of the financial schoolPeriods of financial science. The essence of classical and neoclassical theory of finance; The role of individual scientists in the development of financial science; The neoclassical theory of finance; Features of development of financial science in Russia; Russian scientists contribution to the development of financial science.
- Topic 2. The financial system, financial markets, the modern theory of financeThe functions of the financial markets. Structure and classification of financial markets (according to the type of financial instruments, according to the method of placement of financial instruments by maturity instruments, according to the method of organization of transactions). The international financial market, eurobonds, euro. International securities market. Financial intermediaries. The role of financial intermediation to ensure the effectiveness of economic development. Types of financial intermediaries. Regulation of the financial system.
- Topic 3. Financial assets: bond (theory and yields), shares (equity valuation).Present value, expectation, and utility
- Topic 4. Market efficiencyTrade and Valuation in Financial Markets. No Arbitrage and No Excess Returns. Market Efficiency. Equilibrium. Aggregation and Comparative Statics. Time Scale of Investment Decisions . Behavioral Finance
- Topic 5. Mean-Variance theory. Expected utility approach.Expected Utility Theory. Origins of Expected Utility Theory. Axiomatic Definition . Measuring the Utility Function. Mean-Variance Theory. Definition, Fundamental Properties, Mean–variance analysis and its limitations, First and the second degree stochastic dominance. Approximating an Investor's Utility Function, Negative Exponential Utility Functions, Inferring Investor Risk Tolerance. The problems with “return” measures. (Normal-not normal distribution, log R_1/R_0, Vasicek, Cox–Ingersoll–Ross, ect.)
- Topic 6. Alternative measures to mean-varianceQuadratic utility, power utility functions. Kinked utility functions & S-shaped value functions. Full-scale optimization. Mahalonobis-Taguchi System (MTS) approach, T-method. Leading-indicators method. Time-series (TS) models.
- Topic 7. Introduction to financial crisis theory. Financial risk managementBusiness cycle theory. Financial fragility. Herd behavior and Adaptive expectations. Market risk tools and strategies
- Topic 8. Advanced Topics in finance.Theory of the Firm . Firm’s Decision Rules. Fisher Separation. The Theorem of Dr`eze . Information Asymmetries on Financial Markets. Information Revealed by Prices . Information Revealed by Trade . Moral Hazard . Adverse Selection. Summary. Time-Continuous Model. A Rough Path to the Black-Scholes Formula. Limitations of the Black-Scholes Model and Extensions .Volatility Smile and Other Unfriendly Effects . Not Normal: Alternatives to Normally Distributed Returns . Preeforecaster, Box-cox transformation. Jonson’s transformation.
- Topic 9. Theory for Financial DecisionsReal Assets versus Financial Assets Financial Markets and the Economy Consumption-Timing Allocation of Risk Separation of Ownership and Management The Players The Financial Crisis
- Topic 10. The interest rate theoryLoanable Funds Theory Movement of Interest Rates over Time Determinants of Interest Rates for Individual Securities
- Topic 11. Bond Prices and YieldsBond Characteristics Call Provisions Innovation in the Bond Market Bond Pricing Bond Yields Default Risk and Bond Pricing Sinking Funds The Expectations Theory The Liquidity Preference Theory
- In-class activities
- Written assignment
- Final ExaminationThe midterm test will take a form of 2 hours (80 min) test of 40 open-ended questions in the LMS environment. The student is exempt from the exam if he has completed all the projects of the course.
- Interim assessment (3 module)0.3 * Final Examination + 0.35 * Homework + 0.15 * In-class activities + 0.2 * Written assignment
- Copeland, T. E., Weston, J. F., & Shastri, K. (2014). Financial Theory and Corporate Policy: Pearson New International Edition (Vol. 4th ed). Harlow, Essex: Pearson. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1418250
- Bek-Thomsen, J., Christiansen, C. O., Jacobsen, S. G., & Thorup, M. (2017). History of Economic Rationalities : Economic Reasoning As Knowledge and Practice Authority. Cham, Switzerland: Springer. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1489353