Module Directory

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.

The aim of this module is:

• To equip student with theoretical and operational/computational skills to deal with financial market data in a post 2007 financial crisis environment.

By the end of this module, students will be expected to be able to:

1. Understand the significance of the boom bust cycle of markets is emphasized along with the role of financial innovations and regulatory incentives in credit and leverage creation.


2. Understand portfolio techniques aimed at dealing with regime switches will be taught and a critical perspective on whether derivatives markets exacerbate or reduce financial market volatility.


3. Learn new modelling tools such as financial network analysis to overcome problems of reductionist models and currently being pioneered at central banks and policy institutions.


4. Understand new perspectives on financial markets that discourage business as usual thinking that precipitated the crisis.


5. Have received rigorous training that will help them with jobs in banking, finance and regulatory institutions such as central banks and policy oriented organizations.

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.

This module will be delivered via:

• One 2-hour lecture per week.
• One 1-hour class per week .