Economic Analysis of Asset Prices
Undergraduate: Level 6
Thursday 05 October 2023
Friday 15 December 2023
08 September 2023
Requisites for this module
(EC115 or BE300 or IA156 or MA101) and EC202
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),
MECNL131 Financial Economics,
MECNLB31 Financial Economics (Including Placement Year),
MECNLB32 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),
BA LX14 Financial Economics and Accounting (Including Foundation Year)
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.
The aims of this module are:
- To understand the impact of uncertainty of asset prices, with the implications for the efficiency of capital markets.
- To explore 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.
By the end of this module, students will be expected to be able to:
- Acquire an appreciation of how economic theories help to account for the determination of asset prices.
- 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.
This module aims to contribute to the development of useful skills in the form of:
- Problem-solving, via the analysis of formal models in finance.
- Communication and literacy in the analysis of issues involving financial markets.
The module further supports employability skills in the form of:
- Awareness of the operation of financial markets in advanced economies.
- Clear, concise and well organised professional written work.
- Personal time management, target-setting to achieve the timely completion of exercises and tests.
While the topics covered are the same for both EC371-6-AU and EC371-7-AU, the differences between the two levels are that level 6 students are expected to have a background in undergraduate economic principles (especially microeconomic theory), while level 7 students would have completed an undergraduate degree (BA or BSc equivalent) but not necessarily with an emphasis on economic principles. This being so, level 6 students are expected to extend their knowledge of economic analysis in the context of financial markets, while level 7 students learn more about how financial markets can be analysed from the perspective of economic theory. (This is how the ‘learning outcomes’ differ in a nuanced way between the two levels.)
It is thus appropriate that the teaching and readings are the same for both groups: what differs is the manner in which students approach and respond to these resources. In this context for instance, students at level 6 are expected to display the skills acquired from their second year of study in the Department of Economics. Level 7 students might demonstrate a less formal knowledge of economics but would bring to their studies a broader knowledge of degree level work.
In order to enable students at each level to demonstrate their knowledge to their best advantage, the assessments (mid-term test and final examination questions) differ, not in the subject matter covered, but instead in the ways in which logical reasoning and economic analysis are applied to answer the questions. In recognising moreover that students are diverse in their range of abilities (at any level), the EC371 assessments provide opportunities for all students to express themselves to their best advantage. The assessment of the differences requires the exercise of academic judgment, of which the examiners are aware and take into account.
The module will be delivered via:
- 2 lectures per week
- One (optional) class per week
in one term.
Roy E. Bailey (2005a) ‘Asset markets and asset prices’, in The economics of financial markets
. Cambridge: Cambridge University Press, pp. 1–32. Available at: https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=132340&site=ehost-live&ebv=EB&ppid=pp_1
Roy E. Bailey (2005e) ‘Predictability of prices and market efficiency’, in The economics of financial markets
. Cambridge: Cambridge University Press, pp. 56–82. Available at: https://app.kortext.com/Shibboleth.sso/Login?entityID=https://idp0.essex.ac.uk/shibboleth&target=https://app.kortext.com/borrow/237680
Roy E. Bailey (2005f) ‘The capital asset pricing model’, in The economics of financial markets
. Cambridge: Cambridge University Press, pp. 143–165. Available at: https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=132340&site=ehost-live&ebv=EB&ppid=pp_143
Roy E. Bailey (2005b) ‘Factor models and the arbitrage pricing theory’, in The economics of financial markets
. Cambridge: Cambridge University Press, pp. 183–199. Available at: https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=132340&site=ehost-live&ebv=EB&ppid=pp_183
Roy E. Bailey (2005c) ‘Options markets I: fundamentals’, in The economics of financial markets
. Cambridge: Cambridge University Press, pp. 438–466. Available at: https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=132340&site=ehost-live&ebv=EB&ppid=pp_438
Roy E. Bailey (2005d) ‘Options markets II: price determination’, in The economics of financial markets
. Cambridge: Cambridge University Press, pp. 467–493. Available at: https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=132340&site=ehost-live&ebv=EB&ppid=pp_467
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
||EC371 Mid-Term Test on Moodle (Level 6 students) - 14/11/2023 - 14:00-16:00
||Main exam: In-Person, Open Book, 120 minutes during Summer (Main Period)
||Reassessment Main exam: In-Person, Open Book, 120 minutes during September (Reassessment Period)
Additional coursework information
Feedback, including a mark, will be provided for each piece of submitted work (assignment essays) via a feedback sheet. Students are also encouraged to discuss draft assignments prior to submission and also marked work following assessment. Feedback is also provided in weekly office hours as well as towards the end of each lecture, when students answer a “quick question” based on the lecture material. A class is held each week to answer exercises on the previous week’s lecture material. Feedback is then provided with answer guidelines for quick questions and exercises posted for students’ consultation in the EC371 Moodle site. A multiple choice test held during the term enables students to obtain feedback on their progress in gaining a grasp of basic EC371 concepts. Before the final examination feedback is provided on students’ answers to previous years’ examination questions and in revision sessions.
Exam format definitions
- Remote, open book: Your exam will take place remotely via an online learning platform. You may refer to any physical or electronic materials during the exam.
- In-person, open book: Your exam will take place on campus under invigilation. You may refer to any physical materials such as paper study notes or a textbook during the exam. Electronic devices may not be used in the exam.
- In-person, open book (restricted): The exam will take place on campus under invigilation. You may refer only to specific physical materials such as a named textbook during the exam. Permitted materials will be specified by your department. Electronic devices may not be used in the exam.
- In-person, closed book: The exam will take place on campus under invigilation. You may not refer to any physical materials or electronic devices during the exam. There may be times when a paper dictionary,
for example, may be permitted in an otherwise closed book exam. Any exceptions will be specified by your department.
Your department will provide further guidance before your exams.
Module supervisor and teaching staff
Mr Roy Bailey, email: email@example.com.
Lectures: Mr Roy Bailey / Classes: Mr Mohd El Diri
For further information, send an email message to firstname.lastname@example.org.
Mr Pedro David Matos Serodio
Mr Teng Ge
Available via Moodle
Of 1004 hours, 10 (1%) hours available to students:
994 hours not recorded due to service coverage or fault;
0 hours not recorded due to opt-out by lecturer(s).
* Please note: due to differing publication schedules, items marked with an asterisk (*) base their information upon the previous academic year.
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