Financial economics
Financial economics is the branch of economics concerned with the workings of financial markets, such as the stock market, and the financing of companies. It can be distinguished from other branches of economics by its "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade."
The questions addressed are typically framed in terms of "time, uncertainty, options and information" [1].
- 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.
Financial economics thus attempts to answer questions such as:
- How are the prices of financial assets determined (stocks, bonds, currencies, and commodities)?
- 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 based on several assumptions - chief amongst these being that financial decision makers are rational (see Homo economicus). However, recently, researchers in Experimental economics and Experimental finance have challenged this assumption. Further, these assumptions are challenged - theoretically - by Behavioral finance, a discipline primarily concerned with the rationality, or lack thereof, of economic agents.
Important concepts
- Risk-free interest rate
- Time value of money
- Fisher separation theorem
- Modigliani-Miller theorem
- Arbitrage
- Rational pricing
- Efficient market theory
- Modern portfolio theory
- Yield curve
- Homo economicus
- Arrow-Debreu model
Finance journals
See also
- Finance
- Value investing
- Financial mathematics
- Financial engineering
- Mathematical economics
- Model (economics)
- Experimental economics
- Experimental finance
- Behavioral finance
- Bank of Sweden Prize in Economic Sciences
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External links and references
- "Macro-Investment Analysis", Professor William Sharpe, Stanford Graduate School of Business
- Great Moments in Financial Economics I, II, III, Prof. Mark Rubinstein, Haas School of Business
- Finance Theory, The History of Economic Thought Website, The New School
- A Short History of Investment Forecasting, Professor Michael Phillips, California State University, Northridge
- Pioneers of Finance, Prof. Larry Guin, Murray State University
- How Modern is Modern Portfolio Theory?, Peter Bernstein
- Fallacies of Financial Economics, John Oswin Schroy, capital-flow-analysis.com
- Financial Economics, greekshares.com