Financial economics

Article in other languages:

Economics
GDP PPP Per Capita IMF 2008.svg
  Economies by region 
General categories

Microeconomics · Macroeconomics
History of economic thought
Methodology · Heterodox approaches
Fields and subfields

Behavioral · Cultural · Evolutionary
Growth · Development · History
International · Economic systems
Monetary and Financial economics
Public and Welfare economics
Health · Labour · Managerial
Business · Information · Game theory
Industrial organization · Law
Agricultural · Natural resource
Environmental · Ecological
Urban · Rural · Regional
Economic geography
Techniques

Mathematical · Econometrics
Experimental · National accounting
Lists

Journals · Publications
Categories · Topics · Economists
Economic ideologies 
The economy: concept and history
Portal.svg Business and Economics Portal
This box: view • talk • edit

Financial economics is the branch of economics 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): 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).

The subject is usually taught at a postgraduate level; see Master of Financial Economics.

Contents

Subject matter

Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance.

It studies:

  • Valuation - Determination of the fair value of an asset
    • How risky is the asset? (identification of the asset appropriate discount rate)
    • What cash flows 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 Econometrics 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 to derive testable or policy implications from acceptable assumptions. Some fundamental ideas in financial economics are portfolio theory, the Capital Asset Pricing Model. 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; efficient market hypothesis). However, recently, researchers in experimental economics and experimental finance have 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.

See also

References

Text document with red question mark.svg
 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)
  1. ^ "Robert C. Merton - Nobel Lecture" (PDF). http://nobelprize.org/nobel_prizes/economics/laureates/1997/merton-lecture.pdf. Retrieved 2009-08-06. 
  2. ^ 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 external links may not follow Wikipedia's content policies or guidelines. Please improve this article by removing excessive or inappropriate external links. (October 2009)

Theory

Context and history

Links and portals

v • d • e
Economics
Macroeconomics
Microeconomics
Sub-disciplines
Methodologies
History
Famous economists
v • d • e
General areas of finance
Retrieved from "http://en.wikipedia.org/wiki/Financial_economics"

Questions for article:

This article is from Wikipedia. All text is available under the terms of the GNU Free Documentation License.


IHS Europe: Infrared Heating Systems for Home and Business.