Title in French: Théorie des marchés financiers
Course code: tba
ECTS credits: 2
Teaching hours: 50h
Type: ground course
Language of instruction: English
Coordinator: Dominique Henriet
Instructor(s): Marielle de Jong (Amundi), Dominique Henriet
Brief description
This course is a ground course for anyone interested in finance. It aims at providing the students with the general concepts that ground the main models of finance. This to better understand the jungle of financial products and the functioning of markets. The practical application of these models will alos be presented through portfolio optimizations. The course is split into two parts. The first part named “Models of finance” introduces the main financial products as well as the corresponding models. The second part is devoted to portfolio management.
Learning outcomes
Understand the functioning of financial markets
Know how to model financial asset value
know how to organize an investment process
Course content
Models of finance
Introduction
Static model: arbitrage free condition
Dynamics (finite discrete models)
The tree of states of nature
Stochastic process on a tree
No arbitrage condition on a dynamic model
Risk neutral probability
Microstructure and behaviour models
The market efficiency hypothesis
The Competitive Rational Expectation Equilibrium
Bid ask spread
Information and High frequency trading
The capital asset pricing model
Continuous models
Deterministic continuous model : the differential equation
Brownian motion and Stochastic integral
Arbitrage free equation
Continuous asset valuation
Portfolio management
Introduction
On the basis of the investment example designed by Elton et al., concepts such as portfolio risk, risk decomposition, the efficient frontier, the Sharpe ratio will be revisitted The students will do elementary exercises (e.g. estimate market betas), estimate a one-factor risk model and carry out a mean-variance optimization in Excel.
Currency investing
On the basis of a ten-currency investment example, the students will familiarize with concepts such as carry trading, the interest rate parity, purchasing power parity, the Siegel paradox and currency hedging. They will estimate a two-factor risk model from a dollar perspective which can then be converted into other perspectives.
Sovereign bonds
On the basis of a fifteen-country investment example, the students will familiarize with inflation-linked- and nominal government bonds. A global bond investment process will be explored by which risk is decomposed into the two Fisher components: inflation and economic growth, as well as in global- versus country-specific risk.
Corporate bonds
Portfolio and index construction
Green and socially responsible investment
Bibliography
Demange & Rochet (2005) “Méthodes mathématiques de la finance”, Economica
Dynkin et al. (2007) “Quantitative Management of Bond Portfolios”. Princeton University Press.
Elton et al. (2014) “Modern Portfolio Theory and Investment Analysis”. Wiley
Grinold & Kahn (1999) “Active portfolio management: a quantitative approach for providing superior returns and controlling risk”. Mc Graw-Hill.