Economic Analysis of Asset Prices

The details
Colchester Campus
Undergraduate: Level 6
Thursday 03 October 2019
Saturday 14 December 2019
20 September 2019


Requisites for this module
(EC115 or BE300 or IA156 or MA101) and EC202



Key module for

BA L100SK Economics,
BSC L101SK Economics,
BA 5A84 Financial Economics (Including Placement Year),
BA L111 Financial Economics,
BA L118 Financial Economics (Including Foundation Year),
BA L195 Financial Economics (Including Year Abroad),
BSC 0Q64 Financial Economics (Including Placement Year),
BSC L114 Financial Economics,
BSC L117 Financial Economics (Including Foundation Year),
BSC L194 Financial Economics (Including Year Abroad),
BA L147 Financial Economics and Accounting (Including Placement Year),
BA L148 Financial Economics and Accounting,
BA L149 Financial Economics and Accounting (Including Year Abroad)

Module description

The module begins with an overview of capital markets and explores limits to the predictability of asset price changes, together with concepts of asset market efficiency. Portfolio theories of asset selection under uncertainty are reviewed, with emphasis on mean-variance analysis. Mean-variance analysis is then adapted to construct the Capital Asset Pricing Model (CAPM). Concepts of arbitrage are examined, and applied to introduce Arbitrage Pricing Theory (APT) in theory and practice.

The module goes on to explore distinctive features of markets for bonds and fixed interest securities. The two main classes of derivatives' markets – for futures and options contracts – are then examined with a view to applications involving the underlying assets in each case.

Module aims

EC371 seeks to understand the impact of uncertainty of asset prices, with the implications for the efficiency of capital markets. The module explores how it is possible to predict assets’ expected rates of return relative to the assets’ risks, going on to examine the relationships between futures and options prices and their underlying assets. EC371 aims also to contribute to the development of useful skills in the form of (i) problem-solving, via the analysis of formal models in finance; (ii) communication and literacy in the analysis of issues involving financial markets. The module further supports employability skills in the form of (i) awareness of the operation of financial markets in advanced economies; (ii) clear, concise and well organised professional written work; (iii) personal time management, target-setting to achieve the timely completion of exercises and tests.

Module learning outcomes

In completing EC371 students will acquire an appreciation of how economic theories help to account for the determination of asset prices. They will learn how to apply analytical reasoning to problems in asset pricing; to build simple models of asset markets based on those studied in the course; and to interpret the mathematics of these models in economic terms.

Module information

Compulsory for:
Year 3 Students on BA in Financial Economics and BSc in Financial Economics

Learning and teaching methods

2 lectures and one (optional) class per week in one term


  • Roy E. Bailey. (2005) 'Predictability of prices and market efficiency', in The economics of financial markets, Cambridge: Cambridge University Press., pp.56-82
  • Roy E. Bailey. (2005) 'The capital asset pricing model', in The economics of financial markets, Cambridge: Cambridge University Press., pp.143-165
  • Bailey, Roy E. (2005) The economics of financial markets, Cambridge: Cambridge University Press.
  • Roy E. Bailey. (2005) 'Factor models and the arbitrage pricing theory', in The economics of financial markets, Cambridge: Cambridge University Press., pp.183-199
  • Roy E. Bailey. (2005) 'Asset markets and asset prices', in The economics of financial markets, Cambridge: Cambridge University Press., pp.1-32
  • Roy E. Bailey. (2005) 'Options markets I: fundamentals', in The economics of financial markets, Cambridge: Cambridge University Press., pp.438-466
  • Roy E. Bailey. (2005) 'Options markets II: price determination', in The economics of financial markets, Cambridge: Cambridge University Press., pp.467-493

The above list is indicative of the essential reading for the course. The library makes provision for all reading list items, with digital provision where possible, and these resources are shared between students. Further reading can be obtained from this module's reading list.

Assessment items, weightings and deadlines

Coursework / exam Description Deadline Weighting
Coursework EC371 Assignment
Exam 120 minutes during Summer (Main Period) (Main)

Overall assessment

Coursework Exam
30% 70%


Coursework Exam
30% 70%
Module supervisor and teaching staff
Lectures & classes: Roy Bailey
For further information, send an email message to



External examiner

Prof Aditya Goenka
The University of Birmingham
Available via Moodle
Of 40 hours, 32 (80%) hours available to students:
8 hours not recorded due to service coverage or fault;
0 hours not recorded due to opt-out by lecturer(s).


Further information

Disclaimer: The University makes every effort to ensure that this information on its Module Directory is accurate and up-to-date. Exceptionally it can be necessary to make changes, for example to programmes, modules, facilities or fees. Examples of such reasons might include a change of law or regulatory requirements, industrial action, lack of demand, departure of key personnel, change in government policy, or withdrawal/reduction of funding. Changes to modules may for example consist of variations to the content and method of delivery or assessment of modules and other services, to discontinue modules and other services and to merge or combine modules. The University will endeavour to keep such changes to a minimum, and will also keep students informed appropriately by updating our programme specifications and module directory.

The full Procedures, Rules and Regulations of the University governing how it operates are set out in the Charter, Statutes and Ordinances and in the University Regulations, Policy and Procedures.