In view of the 2007 financial crisis, the role of financial markets and the usefulness of risk management models have been called into question. The oversights that led to market and regulatory failures entail the use of reductionist financial models that abstract from institutions, incentives and strategic behaviour of market participants. This course is divided into 4 parts. In Part I, we will start with an overview of the 2007 financial crisis and the challenges it poses for financial economics.
Part II of the course reviews the scope of risk and return in and the role of equity/stock markets. The extreme boom bust characteristics of financial markets imply that the textbook models of the last two decades that assume Gaussian properties for asset returns have been found to be wrong. In addition to standard Capital Asset Pricing Model and the Markovitz model of equity portfolio management, the student is introduced to a more realistic regime switching portfolio model better suited to deal with boom bust characteristics of markets. In
Part III, the role of derivatives for risk mitigation in financial markets is studied. The Black-Scholes option pricing model under conditions of Brownian Motion is reviewed. The use of index futures for overcoming market risk is analysed. Part IV will look at systemic risk from financial activity in global derivatives markets, which are purported to enable risk sharing. Systemic risk is viewed as a negative externality problem for which financial network models have been put forward to provide holistic visualization to avoid fallacy of composition problems that lead to poor financial decisions and regulation.
Part II of the course reviews the scope of risk and return in and the role of equity/stock markets. The extreme boom bust characteristics of financial markets imply that the textbook models of the last two decades that assume Gaussian properties for asset returns have been found to be wrong. In addition to standard Capital Asset Pricing Model and the Markovitz model of equity portfolio management, the student is introduced to a more realistic regime switching portfolio model better suited to deal with boom bust characteristics of markets. In
Part III, the role of derivatives for risk mitigation in financial markets is studied. The Black-Scholes option pricing model under conditions of Brownian Motion is reviewed. The use of index futures for overcoming market risk is analysed. Part IV will look at systemic risk from financial activity in global derivatives markets, which are purported to enable risk sharing. Systemic risk is viewed as a negative externality problem for which financial network models have been put forward to provide holistic visualization to avoid fallacy of composition problems that lead to poor financial decisions and regulation.
- Module Supervisor: Sheri Markose