University of Alberta Department of Economics
Economics 442-A2
Economics of Financial Markets
Fall Term 2016
Classroom: Tory B-117 Class times: MWF 12-1250
Instructor: Dr. R. Todd Smith Office: Tory 9-27
Office Hours: MWF 1030-1130
or by appointment (email: [email protected])
A BRIEF OVERVIEW OF THE COURSE
This course is intended to provide an introduction to the main types of securities, the structure of securities markets, and pricing relationships in securities markets. We will examine institutional features, theoretical pricing relationships, as well as elementary trading strategies in fixed-income, equity, options, forwards/futures, swap, and repo markets. The course presumes a basic understanding of algebra, calculus, and statistics.
ASSESSMENT
Assessment will be based on two midterm examinations and a final examination. The midterms are each worth 20 percent and the final exam is worth 60 percent of your final grade. The final exam covers all the material in the course. Each midterm covers the material since the previous midterm (i.e., it is not cumulative). The two midterm exams will take place during the scheduled classes on October 5 and November 2. The final examination will be two hours and is scheduled for 2PM on December 16 in the regular classroom. Please confirm the final exam date when exam dates are finalized by the University. You may not use any electronic device during an exam except a standard calculator (NOT a calculator app on a smartphone, tablet, etc.; you cannot access such devices during the exam and you cannot take one with you if you must go to the washroom during an exam.)
Students that are absent for a midterm exam shall, upon provision of satisfactory
evidence for why the student was absent, have the weight of that exam moved to the final examination. Regarding absences from final examinations, as stated in University
Regulations (see here), “A deferred examination will not be approved if a student (a) has not been in regular attendance where attendance and/or participation are required, and/or, (b) excluding the final exam, has completed less than half of the assigned work.”
Sample examinations and supplementary material is available at the following Google Drive link: course site here
UNIVERSITY POLICIES (i) Prerequisite and/or co-requisites
Prerequisites: ECON 281, STAT 141 or equivalent, and MATH 113 or SCI 100 or equivalent. Students may not receive credit for both ECON 442 and FIN 412.
Please note that the current University registration system does not accommodate pre- requisite checking.
(ii) Renumbered courses
This course has not been renumbered.
(iii) Academic Integrity
“The University of Alberta is committed to the highest standards of academic integrity and honesty. Students are expected to be familiar with these standards regarding
academic honesty and to uphold the policies of the University in this respect. Students are particularly urged to familiarize themselves with the provisions of the Code of Student Behaviour (online at www.governance.ualberta.ca) and avoid any behaviour which could potentially result in suspicions of cheating, plagiarism, misrepresentation of facts and/or participation in an offence. Academic dishonesty is a serious offence and can result in suspension or expulsion from the University.”
Because of the seriousness of plagiarism and cheating, students are advised that the Code of Student Behaviour should be reviewed since ignorance is not acceptable as a defence in cases of academic offences. Students should be informed that when cheating and/or plagiarism has been determined to have occurred, a number of sanctions can be imposed, such as lowering a grade or expulsion from the University. All students must read and familiarize themselves with the Code of Student Behavior, found at this link: Code of Student Behavior .
(iv) Course Outlines
Policy about course outlines can be found in §23.4(2) of the University Calendar in the Evaluation Procedures and Grading System section.
(v) Audio or video recording, digital or otherwise, of lectures, labs, seminars or any other
solely for personal study, and is not to be used or distributed for any other purpose without prior written consent from the content author(s).
(vi) You must show your student ID card at midterm and final exams.
GRADING
Grading of term work will be computed on the 100 point scale. Your final letter grade in the course will be determined by the following mapping from your percentage average to the letter grades.
Letter grade percentage average
A+ 91-100
A 86-90
A- 82-85
B+ 78-81
B 74-77
B- 70-73
C+ 65-69
C 60-64
C- 56-59
D+ 51-55
D 46-50
F below 45
Scaling of grades: The Faculty of Arts recommends that the class average in each undergraduate course fall in a range around the Faculty historical average grade for that course level, where the width of the range is .6 (an approximately two letter grade increment spread; for example from B- to B+). The effective range for each level is:
Class level Historical Average Lower Bound Upper Bound
100 2.78 2.48 3.08 200 2.93 2.63 3.23 300 3.02 2.72 3.32 400 3.28 2.98 3.58 For ECON 442 this means the average should fall in the range 2.98-3.58.
TEXTBOOK It is suggested that you acquire the following textbook:
Modern Portfolio Theory and Investment Analysis, 9th Edition, Edwin J. Elton, Martin J.
Gruber, Stephen J. Brown, and William N. Goetzmann (John Wiley). (Note: earlier editions are adequate for this course.) The textbook in print form costs in the
neighborhood of $200 on Amazon or the publisher’s website, but an e-book version can be purchased for around $50.
All chapter references below relate to this textbook. However, I emphasize that lectures are not taken straight from the textbook, so lectures and the text are meant to complement one another. A substantial portion of the course content is NOT in the textbook, so
lectures and the book are not close substitutes. Note that if you miss lectures you should get the notes from a classmate; I do not lend my lecture notes and I do not have electronic copies of them.
COURSE OUTLINE
A. Institutional Features of Securities Markets Chapters 2-3
B. Mean/Variance Portfolio Choice and the CAPM
B-1 Diversification of Risk Chapter 4
B-2 Opportunity Set Chapter 5
B-3 CAPM Chapter 13
C. Fixed-Income Securities
C-1 Bond Price, Yield, and Duration Chapters 21-22 C-2 Callable and Convertible Bonds
C-3 Preferred Shares
D. Options Markets Chapter 23
D-1 Introduction and Market Structure D-2 Dominance Theorems
D-3 Basic Option Strategies D-4 Option Pricing
E. Forwards, Futures, Swaps, and Repos Chapter 24 E-1 Introduction to Futures and Forwards
E-2 Hedging, Insurance, Arbitrage, and Futures and Forwards Prices
If time permits, we will discuss some of the following topics:
F. Investment in Practice Chapters 25-27
F-1 The Equity Premium
F-2 Patterns in Stock Returns; Security Analysis F-3 Passive versus Active Investment Management