economics 136 syllabus

UNIVERSITY OF CALIFORNIADepartment of Economics

Econ 136 Course OutlineSpring 2014

Economics 136: Financial Economics

Instructor: Raymond J. Hawkins ([email protected])

This course is an introduction to financial economics. We will cover the theory andanalytical tools used to make investment decisions as well as paradigms of security valuation.Important themes in the course include risk, return, arbitrage and diversification.

Financial economics is a quantitative subject. Calculus, statistics, and microeconomicsare prerequisites. We will use calculus, statistics and analytical tools developed duringthe course. Use of a spreadsheet package like Excel will be important for the homeworkassignments.

Requirements

The course requirements are (i) ten graded problem sets, (ii) two midterm exams, and(iii) a final exam. Some of the problem sets will involve data work. Your course grade willbe determined as follows:

Problem Sets 20%Midterms 40% (20% each)Final 40%

The first midterm will be in class on Wednesday February 26; the second midterm willbe in class on Wednesday April 2. The final exam will be from 3:00-6:00 p.m. on Friday May16 at a location yet to be determined.

Meeting Times, Discussion Sections and GSIs

The class will meet for lectures on Mondays and Wednesdays from 5:007:30 in 100 GPB(Genetics and Plant Biology Building). In addition, sections will meet once a week for onehour. The GSIs for this course are Thomas Beckford ([email protected]), MenaBoyadzhiev ([email protected]), and Xiaoding Zhuo ([email protected]). Sec-tions will review background material, explain computational & analytical techniques, andextend & amplify concepts introduced in the lectures. The GSIs will also hold weekly officehours. Your first point of contact for questions regarding course material is your GSI. If thesections or meetings with the GSIs do not resolve your questions, you are welcome to stopby my office (675 Evans) during office hours (Tuesday and Thursday from 2:303:30) or atother times by appointment.

Texts and Other Reading

The textbook for the course is

Investments by Zvi Bodie, Alex Kane and Alan Marcus.Readings will also be assigned from journal articles (cf. Course Outline below) as well as

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Manias, Panics, and Crashes: A History of Financial Crises by Charles Kindlebergerand Robert Aliber.

I will reference the latest editions, but do not require that you use that particular edition. Iwill assign readings and expect that you will read the material as the course proceeds. Otherworks that you may find interesting include:

Continuous-Time Finance by Robert Merton. Expected Returns: An Investors Guide to Harvesting Market Rewards by Antti Ilma-

nen (available for free download at www.cfapubs.org). This is a condensed version ofhis book Expected Returns on Major Asset Classes.

Fixed Income Securities: Tools for Todays Markets by Bruce Tuckman and AngelSerrat.

Investment Valuation: Tools and Techniques for Determining the Value of Any Assetby Aswath Damodaran.

Lecture slides will be posted on the bSpace course website.

Learning Goals

As part of Berkeleys Undergraduate Student Learning Initiative (USLI), the EconomicsDepartment has developed learning goals for the Economics major. The learning goals forthis course include

Critical Thinking Skills: CT1: Apply economic analysis to evaluate everyday prob-lems; CT2: Apply economic analysis to evaluate specific policy proposals; CT3: Com-pare two or more arguments that have different conclusions to a specific issue or prob-lem; CT4: Understand the role of assumptions in arguments.

Quantitative Skills: QT1: Understand how to use empirical evidence to evaluatean economic argument; QT2: Interpret statistical results; QT3: Conduct appropriatestatistical analysis of data, and explain the statistical problems involved.

Problem Solving Skills: PS1: Solve problems that have clear solutions; PS2: Pro-pose solutions for problems that do not have clear answers, and indicate under whatconditions they may be viable solutions.

Specialized Knowledge in fields: SP1: In specific content areas (fields) of eco-nomics, develop deeper critical and quantitative thinking skills and apply problem-solving skills to complex problems.




Communication Skills: CS1: Communicate effectively in written, spoken, andgraphical form about specific economic issues; CS2: Formulate a well-organized writtenargument that states assumptions and hypotheses, which are supported by evidence.

Lifelong Learning Skills: LL2: Know how to locate and use primary data sources(e.g., BLS Household Survey, UN Human Development Index). LL3: Understand andevaluate current economic events and new economic ideas.

Course Outline

1. Introduction: Capital structure, risk and derivatives. Overview of financial markets.Return, probability and risk. Reading: Bodie, Kane and Marcus (BKM) Chapters 1-3and 5. Selections from X. Gabaix, Power Laws in Economics and Finance, AnnualReview of Economics, 1, 255293 (2009).

2. Derivatives: Arbitrage and the Law of One Price. Covered Interest Arbitrage.Futures, options, synthetic derivatives and hedging. Put-call parity and the Black-Scholes-Merton model. Reading: BKM Chapters 20-22 and 23.1.

3. Fixed Income: The time value of money. Valuation of zero-coupon and couponbonds. The term-structure of interest rates. Corporate bonds. Credit. Mortgages andmortgage-backed securities. Interest-rate swaps. Deposit Insurance. Reading: BKMChapters 14, 15 and 16.1-16.3.

4. Market Instability and the Financial Crisis: Keynes on the trade cycle. Minskyand the Financial Instability Hypothesis. Reading: J.M. Keynes, The General Theoryof Employment, The Quarterly Journal of Economics 51, 209223 (1937). H.P. Minsky,The Financial Instability Hypothesis: An Interpretation of Keynes and an Alternativeto Standard Theory, Nebraska Journal of Economics & Business 16, 516 (1977).Kindleberger & Aliber Chapters 1 & 2.

5. Equities: The dividend discount model. The Gordon growth model. Return on equity.Reading: BKM Chapter 18.

6. Portfolios: The Capital Asset Pricing Model (CAPM): Mean-variance analysis &diversification. Empirical and conceptual impact of the CAPM. Multifactor Models andArbitrage Pricing Theory. The Efficient Market hypothesis. Mispricing and behavioralfinance. Reading: BKM Chapters 4,5-12.

Disclaimer

This syllabus is a living document and subject to revision. Whenever the syllabus isrevised it will be posted to bSpace and an email will be sent to all class participants informingthem of the posting and indicating what has been revised. This version of the syllabus wasgenerated on January 20, 2014.




Important Class Policies

1. Attendance will generally not be taken in class. You need not contact me or your GSIif you will miss class. There will be no unannounced quizzes. However, much of themid-term and final exam material will be based on lectures and discussionsin class.

2. Personal electronics:

Laptops should not be open in class. They are distracting to those around you. Cell phones should be silenced or in vibrate mode: preferably off. Texting during the lecture should be kept to an absolute minimum.

3. Email. Your first point of contact for questions regarding course material is your GSI.I am available to answer questions about course policy and course material. I will tryto respond within 48 hours of receiving your email.

4. Code of Ethics. You are expected to know the Berkeley Campus Code of Conductand to conduct yourself in this class accordingly. In particular, all forms of academicmisconduct including but not limited to cheating, fabrication, plagiarism, or facilitatingacademic dishonesty will not be tolerated. Please review the definitions of cheatingposted at The Center for Student Conduct.

Any evidence of cheating will result in a score of zero (0) on that assignment or exam.Cheating on the final exam will result in an F for the course. Incidences of cheatingwill also be reported to Student Judicial Affairs.

5. Honor Code. The student community at UC Berkeley has adopted the followingHonor Code: As a member of the UC Berkeley community, I act with hon-esty, integrity, and respect for others. This is new this year. The new HonorCode, as distinct from the Student Code of Conduct, is intended to provide a vehicle forcampus-wide awareness and discussion of issues of academic integrity. In the comingmonths you will notice mention of the Honor Code in a number of contexts, includingstudent orientation and signage in classrooms. You can find more information on theHonor Code website created by the ASUC, complete with FAQs.

6. Problem sets are due no later than the beginning of class on the due date. You mustsubmit your own work. Copied problem sets will receive a score of zero (0). Gradedproblem set will be returned in your discussion sections.

7. DSP exam accommodation. If you are entitled to special accommodation on examslet me know as soon as possible; preferably no later than the end of the second weekof the semester.




8. Missed Exams. There are no make-up exams. If you miss a midterm you mustcontact me before the exam with an excuse that meets University standards.1 Pleasebe prepared to provide documentation to support your excuse. If you do not have anappropriate, documented excuse for an exam you will receive a zero (0) for that exam.If you miss the final with an excuse that meets University standards you will receivean incomplete for the course and will be required to take the final for the course duringthe fall of 2014 in order to get credit for the class. Please take the necessary steps toensure that you do not have travel plans that conflict with the final as this will not beconsidered an acceptable excuse for missing the final.

9. Exam regrade requests. The GSIs take great care in grading exams. If you believethere was an error in adding up the point on your exam, simply point this out to yourGSI at the end of section when you receive your exam back. If you believe there to bean error in the grading of your exam, here are the steps you must follow:

(a) Within 7 days of the time that the exams are first returned, give your GSI yourexam and a written (i.e. word processed) request listing the question(s) you thinkshould be regraded and an explanation of why.

(b) Your GSI reserves the right to regrade your entire exam, not just the question(s)mentioned in your regrade request. Scores on any question can be changed (in-creased or decreased). It is possible for you to end up with fewer points at theend of the regrade than you had originally.

(c) I have advised the GSIs to reject an regrade request that is for fewer than 3 pointsper question.

10. Course Grading. Your course letter grade will be determined solely from the weighted-average percentage of your graded assignments & exams using a curve. Your final examwill be held by the economics department for 12 months. Final exams cannot be re-evaluated once grades are submitted to the Registrars Office. You can look at yourgraded exam in 508-1 Evans Hall, generally beginning about 3 weeks after the end ofthe semester.

11. P/NP Option. Students taking the course under the P/NP option must earn at leasta C to pass the course.

1Religious holidays not recognized by the University must accompanied by a letter from a religious leader.Schedules for official team events must be provided to me by the end of the second full week of the semester.A death in the family must be documented. Illness or injury must be accompanied by a note from a physicianor clinic, on their letterhead. The Tang Center can provide you with documentation.




Important Campus Policies and Guidelines

1. ACCOMMODATION OF RELIGIOUS CREED

In compliance with Education code, Section 92640(a), it is the official policy of the Uni-versity of California at Berkeley to permit any student to undergo a test or examination,without penalty, at a time when that activity would not violate the students religiouscreed, unless administering the examination at an alternative time would impose anundue hardship that could not reasonably have been avoided. Requests to accommo-date a students religious creed by scheduling tests or examinations at alternative timesshould be submitted directly to the faculty member responsible for administering theexamination by the second week of the semester.

Reasonable common sense, judgment and the pursuit of mutual goodwill should resultin the positive resolution of scheduling conflicts. The regular campus appeals processapplies if a mutually satisfactory arrangement cannot be achieved.

The link to this policy is available in the Religious Creed section of the AcademicCalendar webpage.

2. CONFLICTS BETWEEN EXTRACURRICULAR ACTIVITIES AND ACADEMICREQUIREMENTS

The Academic Senate has established Guidelines Concerning Scheduling Conflicts withAcademic Requirements to address the issue of conflicts that arise between extracur-ricular activities and academic requirements. They specifically concern the schedulesof student athletes, student musicians, those with out-of-town interviews, and otherstudents with activities (e.g., classes missed as the result of religious holy days) thatcompete with academic obligations. The guidelines assign responsibilities as follows:

It is the instructors responsibility to give students a schedule, available on thesyllabus in the first week of instruction, of all class sessions, exams, tests, projectdeadlines, field trips, and any other required class activities.

It is the students responsibility to notify the instructor(s) in writing by the secondweek of the semester of any potential conflict(s) and to recommend a solution, withthe understanding that an earlier deadline or date of examination may be the mostpracticable solution.

It is the students responsibility to inform him/herself about material missed be-cause of an absence, whether or not he/she has been formally excused.

The link to the complete guidelines is available on the Academic Senate website.

A useful checklist to help instructors and students comply with the policy is availableon the Office of Educational Development website.




3. READING, REVIEW, RECITATION (RRR) WEEK

In Fall 2009, the campus instituted a Reading, Review, Recitation (RRR) period beforefinal exams. For the coming semesters, please keep these dates in mind:

In Spring 2014, classes end on Friday, May 2, 2014. RRR Week will take place betweenthe last day of classes (May 2) and the first day of the final exam period (May 12, 2014).

RRR Week is intended to provide students time to prepare for exams, to work onpapers and projects, and to participate in optional review sessions and meetings withinstructors. Presentations of capstone projects, oral presentations, and performancesare permitted, although flexibility in scheduling may be required to accommodatestudents individual schedules. The introduction of new material is not permitted.Mandatory exams or quizzes and other mandatory activities are also not permitted,with some very limited exceptions (capstone presentations, for example).

Please keep in mind that final exams and papers or projects substituting for final examsmay not be due before the final exam week.

Detailed, updated guidelines on permissible organized activities during the RRR weekare available on the Office of the Registrars website.

In addition, the Office of Educational Development has prepared some suggestions onmaking RRR week productive for instructors and students. If you have tips or ideasyou would like to have added to this page, please contact the Office of EducationalDevelopment.

4. COMMENCEMENT CEREMONIES AND FINAL EXAMS

In Spring 2010, the campus instituted a new policy that graduation ceremonies musttake place after the conclusion of final examinations, with the exception of professionalschool ceremonies with graduate students only.

For Spring 2014, final exams end at 10 pm on Friday, May 16, 2014.

In Spring 2014, the Graduates Convocation will be held Saturday May 17, 2014. Formore information, please see the Commencement Convocation Events Office website.


economics 136 syllabus

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