- Financial economics
Financial economics is the branch of
economicsconcerned 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).
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 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 economicsand Experimental financehave 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.
Risk-free interest rate
Time value of money
Fisher separation theorem
Efficient market theory
Modern portfolio theory
Journal of Finance
Review of Financial Studies
Journal of Financial Economics
Financial Analysts Journal
Journal of Investment Management
*Bank of Sweden Prize in Economic Sciences
External links and references
* [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]
Master's degrees in financial economics are often a joint offering by the business schooland the economics department.
Wikimedia Foundation. 2010.
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