Advanced Empirical Finance

Mr Alexandre Kohlhas and Mr Saleem Bahaj

When is it a good time to enter the market? In which assets should you invest? Are financial markets really efficient? In this course we will explore some of the key topics in modern Finance, such as the Efficient Market Hypothesis, Modern Portfolio Theory, the Capital Asset Pricing model, the pricing of options and other derivatives, and the factors behind the financial crisis in 2007 and 2008. The focus will be on understanding the theory and its implications, the assumptions underpinning it and the data supporting these assumptions. Students will get hands-on experience obtaining and analysing financial data, they will be introduced to quantitative portfolio modelling techniques and they will learn how to price simple options and derivatives. By the end of the course, students should have developed a critical understanding of modern concepts in Finance, and gained some of the skills necessary for further study or a career in Finance.

This course is aimed at: Students in Economics, Finance or related subjects. Students with mathematical or quantitative backgrounds who have some prior knowledge in Economics or Finance. Students who have completed the course “Introduction to Finance and Methods of Quantitative Analysis”.

Prerequisites: Background knowledge in introductory Economics and Finance courses is essential. Due to the quantitative nature of the course, knowledge of calculus, linear algebra and statistics / econometrics is required. A working knowledge of Excel is also desirable. Otherwise, you are advised to attend Module 1 “Introduction to Finance & Methods of Quantitative Analysis” before taking this Module 2 course.

Transferable knowledge and skills: Students will develop a critical understanding of key concepts and ideas in Finance; they will also learn how to obtain financial data and how to model different finance problems using Excel.

Main readings:

The course will centre on the following textbooks:

  •  Elton, Gruber, Brown, and Goetzmann (2010), Modern Portfolio Theory and Investment Analysis, 8th edition, Wiley
  • Hull (2011), Options, Futures, and Other Derivatives, 8th edition, Pearson

 

Where necessary, students will be referred to other textbooks or articles. These supplementary references include

  • Bodie, Kane and Marcus (2011), Investments and Portfolio Management, Global 9th Edition, McGraw-Hill / Irwin

Before the start of the course, students are strongly encouraged to keep up to date with financial news, for example by reading The Economist or the Financial Times.

Assessment:

1 Final Exam: 45%

1 Final Essay: 45%

 Participation, progress and attendance: 10%

Lecture hours: 12 x 1 hour 15 minutes (total 15 hours)

Seminar hours: 8 x 1 hour 15 minutes (total 10 hours