Financial Economics

Module Code ECNU3FE
Semester Autumn
Prerequisite ECNU211
Level 10
Credit Value 20
Module Co-ordinator Dr Theo Diasakos
Assessment 40% Coursework, 60% examination


This module will introduce the major topics in financial economics, including portfolio theory and diversification, mean-variance analysis, asset-pricing models, the efficient market hypothesis, and some market anomalies. The scope of the module ranges from basic concepts, such as the financial instruments and how they are traded or the key tools used for financial analysis, to the foundations of bond- and derivative-pricing, and the development of the CAPM and APT/factor models. The theoretical and empirical implications of the latter asset-pricing models for evaluating portfolio performance will be studied in depth.


  • Starting from the concepts of return and risk, we will formally derive the basic elements of portfolio theory. We will see how this theory leads to variations of the standard valuation model for investments – the CAPM. We will then proceed to derive alternative asset pricing models to the CAPM, and learn how the latter differs from them in its theoretical assumptions and predictions. We will overview some recent theoretical challenges to standard asset pricing models that derive from relaxing the standard assumptions about market efficiency.
  • You will see how separate is the theory of option pricing from standard risk-return pricing models, and how different are the theoretical foundations of option pricing. We will formalise the so-called “no-arbitrage” condition and show how it constitutes the basic theoretical foundation of all option pricing models. You will learn how to use the “no-arbitrage” condition to develop richer and more detailed option pricing models

You will develop knowledge and understanding of:

  • financial instruments;
  • the risk and return relationship;
  • diversification and mean-variance analysis;
  • asset-pricing models;
  • the efficient market hypothesis;
  • calendar anomalies;
  • security prices and yields;
  • derivatives;
  • the financial crisis 2007-08.


The core text book for this module is:

  •  Investments by Z. Bodie, A. Kane , and A.J. Marcus, Global ed.10E, 2014 McGraw-Hill - ISBN 9780077161149
  • An Introduction to Derivative Securities, Financial Markets, and Risk Management by Jarrow R.A. and A.

Additional readings:

Chatterjea, 5th ed. 2013 W.W. Norton & Co. – ISBN 978039391307

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