Syllabus. VU Foundations of Financial Economics and Financial Intermediation 1 (VU Grundlagen der Finanzierungstheorie und der Finanzintermediation 1)

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1 INSTITUT FÜR BANKEN UND FINANZEN UNIV.-PROF. DR. MATTHIAS BANK UNIV.-PROF. DR.DR. JÜRGEN HUBER Syllabus VU Foundations of Financial Economics and Financial Intermediation 1 (VU Grundlagen der Finanzierungstheorie und der Finanzintermediation 1) (7.5 ECTS-AP, total workload hours, 45 hours in class) Part I (Lecturer: J. Huber) Part I has an overall workload of hours. There are 20 contact units with 45 minutes each. Part I includes three fields of study (see below) and is based on an advanced textbook in financial economics and intends to teach how to handle such a book. Students have to prepare selected chapters for class. In class, the relevant contents will be presented by the lecturer and discussed with students. Grading of part I: Quality of contributions in discussions Quality of the response to direct questions Mid-term exam (mid-term exam and final exam combined must be 4 or better) Recommended allocation of time (total of hours): Attending class: 20 units = 15 hours Preparation of textbook chapters = 50 hours Preparation for the mid-term exam: hours 1

2 Part II (Lecturer: M. Bank) Part II has an overall workload of hours. There are 22 contact units with 45 minutes each. Part II includes four fields of study (see below). In every field an overview is given by the lecturer. Students have to prepare selected papers for class. Essay writing Every student has to hand in essays for 8 out of 12 papers (min. length: 5000 characters, including space characters; max. length: 6000 characters, including space characters; without cover sheet and references; 12 pt, Times Roman) in a timely manner. Every essay (in English only) should address the following questions: What is the paper about? What is the methodology? What are the main findings? What was new at the time published? The papers are assigned to the students by the lecturer. Timetables with deadlines are provided. Preparation of group presentations and handouts Groups of students have to prepare a joint presentation about the selected papers. Every student has to be involved in the preparation of one presentation from every field of study (in total 4). The presentations in class should have a length of about minutes. A handout with the main issues is required. Presentation in class By chance, one group of students has to deliver the presentation of a paper in class. There will be a subsequent discussion of the papers. Every student has to be involved in (at least) one presentation in class. All students must comply with good scientific practice. Grading of part II (grades range from 1 to 5): Quality of every written essay; must be 4 or better for every essay Quality of the individual presentation and the group handout; must be 4 or better for every presentation and handout Quality of contributions in discussions Quality of the response to direct questions Final exam (mid-term exam and final exam combined must be 4 or better) Recommended allocation of time (total of hours): Attending class: 22 units = 16.5 hours Reading and understanding the papers (see the four questions above) and writing the essays: on average 7 hours per paper x 8 papers = 56 hours in total Preparation of the presentation and the handout within the group: on average 3 hours x 4 presentations = 12 hours in total Preparation of the final exam: 9.25 hours 2

3 Introduction (1 unit) Part I (J. Huber, 20 units) A. Markets, Models, Interest rates, Utility Maximization, Risk (all chapters from Cvitanic and Fernando Zapatero (2004) Financial Markets, Interest Rates (Ch. 1+2) Models of Securities Prices (Ch. 3) Optimal Consumption/Portfolio Strategies (Ch. 4) Risk (Ch. 5) Literature Cvitanic and Fernando Zapatero (2004), Ch. 1-5 B. Pricing and Hedging of Derivative Securities Arbitrage and Risk-Neutral Pricing (Ch. 6) Option Pricing (Ch. 7) Fixed-Income Market Models and Derivatives (Ch. 8) Hedging (Ch. 9) Bond Hedging (Ch. 10) Numerical Models (Ch. 11) Literature Cvitanic and Fernando Zapatero (2004), Ch C. Equilibrium Models Equilibrium fundamentals (Ch. 12) CAPM (Ch. 13) Multifactor Models (Ch. 14) Other Pure Exchange Equilibria (Ch. 15) Literature Cvitanic and Fernando Zapatero (2004), Ch Mid-term Exam (1 unit) 3

4 Part II (M. Bank, 22 units) D. Behavioral Finance Theory Standard Finance vs. Behavioral Finance Prospect Theory and Investor Psychology Empirical Evidence Fama, E. (1998), Market Efficiency, Long-Term Returns, and Behavioural Finance, Journal of Financial Economics 49, Daniel, K., D. Hirshleifer, and A. Subrahmanyam (1998), Investor Psychology and Security Market Under- and Overreaction, Journal of Finance 53, Shleifer, A. and Vishny (1997), Limits of Arbitrage, Journal of Finance 52, E. Theory of Financial Intermediation Financial Intermediaries in the Neoclassical model Why do Financial Intermediaries exist? Empirical Evidence Benson and C.W. Smith (1976), A Transaction Cost Approach to the Theory of Financial Intermediation, Journal of Finance 31, Diamond, D.W. (1984), Financial Intermediation and Delegated Monitoring, Review of Economic Studies 51, Leland, H. and D. Pyle (1977), Informational Asymmetries, Financial Structure, and Financial Intermediation, Journal of Finance 32, F. Theory of the Banking Firm Objectives of a Banking Firm Theory of Deposit Contracts Credit Risk and Risk Measurement Regulation in Banking Klein, M.A. (1971), A Theory of the Banking Firm, Journal of Money, Credit and Banking 3, Merton, R.C. (1977), An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees, Journal of Banking and Finance 1, 3-11 Stiglitz, J. and A. Weiss (1981), Credit Rationing in Markets with Imperfect Information, American Economic Review, 71,

5 G. Market Microstructure Theory Trading Mechanisms and the Design of Exchanges Autocorrelation in Security Prices Sequential Models and Strategic Models Regulation of Exchanges Demsetz, H. (1968), The Cost of Transacting, Quarterly Journal of Economics 82, Kyle, A.S. (1985), Continuous Actions and Insider Trading, Econometrica 53, Stoll, H. (1978), The Supply of Dealer Services in Securities Markets, Journal of Finance 33, Final Exam (1 unit) 5

6 Textbook for Part I Jaska Cvitanic and Fernando Zapatero (2004). Introduction to the Economics and Mathematics of Financial Markets. MIT Press. References for Part II (Textbooks) Bank, M. and W. Gerke (2005), Finanzierung II, Kohlhammer Verlag Copeland, T.E., J.F. Weston, and K. Shastri (2005), Financial Theory and Corporate Policy, 3 rd ed., Pearson Addison Wesley Freixas, X. and J.-C. Rochet (1997), Microeconomics of Banking, Cambridge Mass. Hasbrouck, J. (2007), Empirical Market Microstructure: The Institutions, Economics, and Econometrics of Securities Trading Hull, J.C. (2007), Options, Futures, and Other Derivatives, 7 th ed., Prentice Hall O'Hara, M. (1995), Market Microstructure Theory, Cambridge Mass. Saunders, A. and M. Millon Cornett (2007), Financial Institutions Management A Risk Management Approach, 6 th ed. McGraw-Hill, New York et al. Shefrin, H. (2005), Behavioral Corporate Finance, McGraw-Hill, New York et al. Shiller, R.J. (2000), Irrational Exuberance, Princeton University Press Timetable (Part I) Wednesday, 07/10/ Introduction (1 unit) Part I Friday, 09/10/ Lecture (4 units) Tuesday, 13/10/ Lecture (4 units) Thursday, 15/10/ Lecture (4 units) Tuesday, 20/10/ Lecture (4 units) Thursday, 22/10/ Lecture (4 units) Thursday, 29/10/ Mid-term exam (1 unit) Part II Wednesday, 14/10/ Lecture (5 units) Friday, 16/10/ Lecture (5 units) Deadline for essay D: Friday, 16/10/09, 9.00 Wednesday, 21/10/ Group Presentation on C (3 units) Deadline for essay E: Wednesday, 21/10/09, 9.00 Friday, 23/10/ Group Presentation on D (3 units) Deadline for essay F: Friday, 23/10/09, 9.00 Wednesday, 28/10/ Group Presentation on E (3 units) Deadline for essay G: Wednesday, 28/10/09, 9.00 Friday, 30/10/ Group Presentation on E (3 units) Friday, 06/11/ Final exam (1 unit) 6