Introductory description

After a short introduction to financial systems, we discuss interest rates and term structure, and the role that central banks play in influencing interest rates. In the context of central banking, we discuss ethical issues around central bank policy goals and implementation. After understanding the basics of interest rates, we study fixed-income securities. We then turn to equity markets and stocks, where we consider how stocks are priced and whether those prices are efficient. In the context of stock markets, we discuss how regulators incentivize ethical behavior for market participants, and how regulation can improve market efficiency. We then consider mortgage markets and securitization, and touch briefly on the financial crisis of the late 2000s. After mortgages, we turn to foreign exchange markets and currency exchange rates. To round out our coverage of financial markets and instruments, we discuss derivative instruments and their use in risk management. Finally, we turn to financial intermediation, where we discuss commercial and investment banking and mutual funds. In the context of financial intermediation, we again discuss how regulators influence financial intermediation and help norms for ethical business practices. In most weeks, you will have a set of problems to solve or a case study to consider, as well as textbook chapters and academic papers to read.

Module web page

Module aims

Outline syllabus

This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.

• Introduction to Financial System

• Interest Rates and Term Structures

• Central Banking, Monetary Policy, and Regulation

• Money Markets and Bond Markets

• Mortgage Markets

• Equity Markets and Regulation

• Derivative Markets

• Commercial Banking and Regulation

• Mutual Funds and Hedge Funds and Regulation

Learning outcomes

By the end of the module, students should be able to:

• Demonstrate comprehensive knowledge of financial markets and instruments - especially mechanics, risks and motivations of different markets and instruments, e.g., equity, fixed-income, derivatives, and mortgage markets - and financial systems, such as banking and financial intermediaries.
• Demonstrate a comprehensive knowledge of the role of Federal Reserve and the impact of monetary policy on interest rates and behaviour of financial markets
• Demonstrate a comprehensive understanding of the trading and portfolios by institutional investors such as mutual funds and hedge funds.
• Demonstrate a comprehensive understanding of how regulation helps to incentivize ethical behaviour and improve market efficiency.
• Critically analyse the relation between federal funds rate and other various interest rates

Indicative reading list

Textbooks:

Mishkin, F. S. and S. G. Eakins, 2018. Financial markets and institutions, 9th Ed., Global Edition, Pearson Education.[M1]

Hull, J. C. (2015). Options, futures, and other derivatives, 9th Ed., Pearson Education.

Saunders, A. and M. M. Cornett, 2015. Financial Markets and Institutions, 6th Ed., McGraw-Hill Higher Education.

Journal Articles:

Bernanke, B. S. (2013). A century of us central banking: Goals, frameworks, accountability. Journal of Economic Perspectives, 27(4), 3–16.

Campbell, J. Y. (1995). Some lessons from the yield curve. Journal of Economic Perspectives, 9(3), 129–152.

Froot, K. A. & Thaler, R. H. (1990). Anomalies: Foreign exchange. Journal of Economic Perspectives, 4(3), 179–192.

Green, R. K. & Wachter, S. M. (2005). The American mortgage in historical and international context. Journal of Economic Perspectives, 19(4), 93–114.

Greenwood, R. & Scharfstein, D. (2013). The growth of finance. Journal of Economic Perspectives, 27(2), 3–28.

Hong, H. & Stein, J. C. (2007). Disagreement and the stock market. Journal of Economic Perspectives, 21(2), 109–128.

Kacperczyk, M. & Schnabl, P. (2010). When safe proved risky: Commercial paper during the financial crisis of 2007-2009. Journal of Economic Perspectives, 24(1), 29–50.

Krishnamurthy, A. (2010). How debt markets have malfunctioned in the crisis. Journal of Economic Perspectives, 24(1), 3–28.

Loughran, T. & Ritter, J. R. (2002). Why don’t issuers get upset about leaving money on the table in IPOs?. The Review of Financial Studies, 15(2), 413–444.

Mayer, C., Pence, K., & Sherlund, S. M. (2009). The rise in mortgage defaults. Journal of Economic Perspectives, 23(1), 27–50.

Mills, L. R. (1968). The mathematics of cumulative voting. Duke LJ, 28.

Philippon, T. & Reshef, A. (2013). An international look at the growth of modern finance. Journal of Economic Perspectives, 27(2), 73–96.

Spulber, D. F. (1996). Market microstructure and intermediation. Journal of Economic Perspectives, 10(3), 135–152.

Stulz, R. M. (2004). Should we fear derivatives?. Journal of Economic Perspectives, 18(3), 173–192.

Stulz, R. M. (2007). Hedge funds: Past, present, and future. Journal of Economic Perspectives, 21(2), 175–194.

Case Studies:

Jiang, J., Li, F., & Yang, Z. Q. (2020). Green trend: The road to an overseas red-chip IPO. Ivey Publishing.

Siriwardane, E. N., Viceira, L. M., & Xu, D. (2020). Mortgage backed securities and the covid-19 pandemic. Harvard Business School.

Nagel, S. (2015). Hedging at Porsche. WDI Publishing.

Misawa, M. (2020). Negative interest rates: The bank of japan experience. University of Hong Kong Business School

Subject specific skills

Identify and evaluate the distinctive roles and motivations for the different financial markets
Evaluate the way of risk management by mutual funds and hedge funds
Evaluate the risk and return profiles of various investments made by mutual funds and hedge funds
Demonstrate the mechanics in details of instruments, such as stock, bond (government and corporate, nominal and real), option, futures, swaps, and structured-products (mortgage-backed securities)

Transferable skills

Written communication