Module ASB-3313:
Financial Economics

Module Facts

Run by Bangor Business School

10 Credits or 5 ECTS Credits

Semester 1

Organiser: Dr Marco Pelliccia

Overall aims and purpose

The aim of this module is to show how core theories in finance and banking derive from foundations in economic theory. It will examine decision making in a utility maximising framework under uncertainty and under asymmetric information; and demonstrate how the main results of finance theory emerge from this framework.

Course content

1. Decision making under uncertainty:

  • Expected value and the St Petersburg paradox.
  • Expected Utility Theory (EUT).
  • Risk aversion.
  • Mean-variance analysis as a special case of EUT.
  • Critiques of EUT – the Allais paradox.

2. Decision making under asymmetric information:

  • Adverse selection.
  • Moral hazard.
  • Principal-agent problems.
  • Applications in finance and banking theory, e.g. capital structure of firms, incentive effects of debt and equity, bank runs.

Assessment Criteria

C- to C+

50-59% Much of the relevant information and skills mostly accurately deployed. Adequate grasp of theoretical/conceptual/practical elements. Fair integration of theory/practice/information in the pursuit of the assessed work's objectives. Some evidence of the use of creative and reflective skills.

threshold

40-49% No major omissions or inaccuracies in the deployment of information/skills. Some grasp of theoretical/conceptual/practical elements. Integration of theory/practice/information present intermittently in pursuit of the assessed work's objectives.

good

60-69% Most of the relevant information accurately deployed. Good grasp of theoretical/conceptual/practical elements. Good integration of theory/practice/information in pursuit of the assessed work's objectives. Evidence of the use of creative and reflective skills.

excellent

70% + An outstanding performance, exceptionally able. The relevant information accurately deployed. Excellent grasp of theoretical/conceptual/practice elements. Good integration of theory/practice/information in pursuit of the assessed work's objectives. Strong evidence of the use of creative and reflective skills.

Learning outcomes

  1. Analyse and critique theories in finance and banking.

  2. Understand and model the key concepts of decision making under asymmetric information.

  3. Understand and model the key concepts of decision making under uncertainty.

Assessment Methods

Type Name Description Weight
Exam S1 2hrs 70
Class Test 30

Teaching and Learning Strategy

Hours
Lecture

One 2-hour lecture each week

22
Private study 78

Transferable skills

  • Literacy - Proficiency in reading and writing through a variety of media
  • Numeracy - Proficiency in using numbers at appropriate levels of accuracy
  • Computer Literacy - Proficiency in using a varied range of computer software
  • Self-Management - Able to work unsupervised in an efficient, punctual and structured manner. To examine the outcomes of tasks and events, and judge levels of quality and importance
  • Exploring - Able to investigate, research and consider alternatives
  • Information retrieval - Able to access different and multiple sources of information
  • Critical analysis & Problem Solving - Able to deconstruct and analyse problems or complex situations. To find solutions to problems through analyses and exploration of all possibilities using appropriate methods, rescources and creativity.
  • Argument - Able to put forward, debate and justify an opinion or a course of action, with an individual or in a wider group setting

Subject specific skills

  • Abstraction. From the study of economic principles and models, students see how one can abstract the essential features of complex systems and provide a useable framework for evaluation and assessment of the effects of policy or other exogenous events. Through this, the typical student will acquire proficiency in how to simplify while still retaining relevance. This is an approach that they can then apply in other contexts, thereby becoming more effective problem-solvers and decision-makers.
  • Analysis, deduction and induction. Economic reasoning is highly deductive, and logical analysis is applied to assumption-based models. However, inductive reasoning is also important. The development of such analytical skills enhances students' problem-solving and decision-making ability.
  • Quantification and design. Data, and their effective organisation, presentation and analysis, are important in economics. The typical student will have some familiarity with the principal sources of economic information and data relevant to industry, commerce, society and government, and have had practice in organising it and presenting it informatively. This skill is important at all stages in the decision-making process.
  • Framing. Through the study of economics, a student should learn how to decide what should be taken as given or fixed for the purposes of setting up and solving a problem, i.e. what the important 'parameters' are in constraining the solution to the problem. Learning to think about how and why these parameters might change encourages a student to place the economic problem in its broader social and political context. This 'framing' skill is important in determining the decision-maker's ability to implement the solutions to problems.

Resources

Talis Reading list

http://readinglists.bangor.ac.uk/modules/asb-3313.html

Reading list

"Economic and Financial Decisions under Risk" by Eeckoudt, Gollier, Schlesinger “Financial Economics” by Eichberger and Harper “Intermediate Microeconomics: A Modern Approach” (9th Edition) by Varian, H.

Pre- and Co-requisite Modules

Pre-requisites:

Courses including this module

Compulsory in courses:

Optional in courses: