Department of Economics
Dalhousie University
ECON 3800
Financial Economics
CRN: 23887
Winter 2013/2014
Instructor : Prof. Kuan Xu
Lecture Time & Location : Tuesday and Thursday: 2:35PM-3:55PM,
Studley SIR JAMES DUNN 101
Office Location : 6220 University Ave. C-22
Office Hours : 3:00PM–4:30PM on Wednesday and 2:00PM–3:30PM on Friday, 6220 University Ave. C-22; or by appointment.
Telephone : 494-6995
E-mail : Kuan.Xu@Dal.Ca
Homepage : http://myweb.dal.ca/kxu/index.htm
Course Description
This course, as a continuation of Money and Banking, is designed to introduce to students the fundamental principles and issues of financial economics in today’s increasingly interrelated and complex financial markets.
This course will cover theories on consumer’s investment behaviours, capital market structure, portfolio theory, asset pricing models, bonds analysis, stocks analysis, and options. In addition, this course will examine common practices and emerging new ideas in financial industry and community.
How to combine latest financial theories with best practices has been a perennial challenge in finance/financial economics. In this course, the instructor attempts to address the topics with this challenge in mind.
This course advocates the ideas that the financial side of economic activities is a mirror image of the real side of these activities and that fundamental analysis on economic activities is indispensable to finance/financial economics.
Textbook
David G. Luenberger, Investment Science, 2nd Edition, Oxford University
Press, 2014. ISBN 978-0-19-974008-6.
This book is the primary textbook used in this course. The exercises in the book will be assigned to students. It is advisable to have a copy of, or
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have convenient access to, this book.
The instructor will provide lecture notes and casual and academic readings associated with the topics covered in the course at BbLearn.
Other Recommened Readings
William F. Sharpe, Gordon J. Alexander, Jeffery V. Bailey, David J.
Fowler, and Dale L. Domian, Investments, 2nd/3rd Canadian Edition, Prentice Hall Canada, 2000. ISBN 0-13-260423 for the 2nd edition; ISBN 0-13-
011445-6 for the 3rd edition.
In 1990, William F. Sharpe shared the Nobel Prize in Economics with
Harry M. Markowitz and Merton H. Miller for their contributions in financial economics. This is a good and less technical reference that students may consult from time to time. This book is available at the Circulation Desk at
Killam Library.
Frank K. Reilly and Keith C. Brown, Investment Analysis and Portfolio Management, 8th Edition, Thomson/South-Western, 2006. ISBN 0-324-
28903-0. (Ch. 10, 12, 13, and 14 will be made available at BbLearn.)
Graig W. Holden, Excel Modeling in Investments, 4th Edition, Pearson,
2012. ISBN 0-12-249787-5. (Samples will be shown in class.)
Evaluation
Students are encouraged to attempt selected exercises in the textbook and then check their solutions given in the textbook. These attempts are essential for learning and will not be graded by the instructor.
The student performance is evaluated as follows:
• Three In-Class Tests 30% (January 30, February 27, and March 27,
2014) 1
•
Group Research Report 30% (Due April 3, 2014)
2
•
Class Participation 10% (Every Class) 3
•
Final Exam 30% (TBA)
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1 These are closed book tests.
2 The research paper requirements and evaluation criteria will be posted at BbLearn.
3 In each class, students will be randomly selected. The participation will be recorded over time.
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Please check http://www.registrar.dal.ca/ for time and location information.
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Please note the following rules:
(1) A review guide for each test will be distributed one week prior to each test.
(2) Each test will last for 40 minutes from 2:35PM to 3:15PM and class resumes at 3:20PM during the class time.
(3) If a student misses any test for a justifiable reason (e.g. Doctor’s note), the missed 10% will be automatically added to the final exam. No make-up test will be given.
(4) Because the group project is on equity/security analysis, the instructor will post related reading materials and sample projects earlier at BbLearn to ensure that students can read these materials throughout the term.
(5) Each group should have 3 students. The members of each group shall contribute about equally to their group research. In the event of a disagreement on equal contributions claimed by the majority of a group, the contribution of each member shall be evaluated by other members of the group (e.g., 0%–100% of the 1 / 3 group work among the three members). The instructor then uses the average contribution recognized by other members
(0%–100%) to determine the contribution of each member.
(6) Please note that final research reports (both hard copies and electronic files) will not be returned. Students should keep their own copies.
(7) To discourage any late submission of final research reports, this course imposes a penalty scheme on all late submissions—a 25% deduction from the total marks per day delayed.
(8) For the group project, students must be aware of the services available at the Writing Centre and must finish Academic Integrity Module at http://www.dal.ca/campus_life/student_services/academic-support/ writing-and-study-skills/academic-integrity-module.html
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The grading scheme in this course is given in Table 1.
Table 1: Faculty of Science Grade Conversion Table
A+ : greater than or equal to 90
A : greater than or equal to 85 and less than 90
A: greater than or equal to 80 and less than 85
B+ : greater than or equal to 75 and less than 80
B : greater than or equal to 70 and less than 75
B: greater than or equal to 65 and less than 70
C+ : greater than or equal to 62 and less than 65
C : greater than or equal to 58 and less than 62
C: greater than or equal to 55 and less than 58
D : greater than or equal to 50 and less than 55
F : less than 50
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Lecture Topics and Assigned Readings (Time Schedule) 5
Lecture 1: Saving, Wealth, and Investment (Week 1)
Readings : Ch. 1 and 11 and Lecture Notes 1.
Advanced Readings : Friedman and Savage (1948), Kahneman and Tversky (1979), List (2004), Levitt and List (2007), Xu and Fisher (2006)
1. Intertemporal savings behavior
2. The determinants of intertemporal behavior
3. Three consumption/saving theories
4. Investments
Lecture 2: Financial Markets and Trading of Securities (Weeks
2–3)
Readings : Ch. 18.1-18.2 and Lecture Notes 2
Advanced Readings : Kelly (1956), Rotando and Thorp (1992), Varian
(1993), MacLean, Thorp and Ziemba (2010), and Starr (2011)
1. Types of orders
2. Margin transactions
3. Short sales
4. Call markets and continuous markets
5. Organization of the stock exchanges
6. Transaction costs
Lecture 3: Portfolio Theory (Weeks 3–4)
Readings : Ch. 6 and 9 and Lecture Notes 3.
Advanced Readings : Tobin (1958), Markowitz (1952, 1991), Roy (1953),
Luenberger (1993), Ibbotson and Kaplan (2000), Hill et al. (2006), and Hill
(2006)
1. Evaluation of risky securities
5 Advanced readings are optional. The schedule is subject to changes.
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2. Portfolio returns
3. Efficient frontier
4. Preferences
5. Optimal portfolios
6. The market model
Lecture 4: Asset Pricing Models (Weeks 4–6)
Readings : Ch. 7-8 and Lecture Notes 4.
Advanced Readings : Sharpe (1964), Lintner (1965), Mossin (1966), French
(2003), Ross (1976a), Gilles and LeRoy (1991), Roll and Ross (1995), Fama and French (1992, 1996, and 1998), and Liu, Zhao and Xu (2011)
1. The Capital Market Line
2. Components of risk
3. The Security Market Line
4. Beta and the market model revisited
5. Factor models
6. Arbitrage Pricing Theory
Lecture 5: Bond Analysis (Weeks 7–9)
Readings : Ch. 2, 3 and 4 and Lecture Notes 5.
Advanced Readings : Weil (1973), Bierwag (1977), Faulhaber and Baumo
(1988), Bierwag et al. (1992), Altman and Saunders (1998), and Livingston and Zhou (2005)
1. Money market instruments
2. Government bonds
3. Corporate bonds
4. Valuation of riskless securities
5. Risk premium and term premium
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6. The term structure of interest rates
7. Bond attributes and determinations of yield spreads
8. Bond market efficiency
9. Convexity
10. Duration
11. Active management
Lecture 6: Equity Analysis (Weeks 9–12)
Readings : Ch 5.6, Lecture Notes 6, and Reilly and Brown (2006, Ch. 10,
12, 13, and 14)
1. The corporate form and common shares
2. Cash dividends
3. Preemptive rights
4. Common stock betas
5. Growth versus value
6. Capitalization-of-income method of valuation
7. The zero-growth model
8. The constant-growth model
9. The multiple-growth model
10. Valuation based on a finite holding period
11. Model based on price-earning ratios
12. Sources of earning growth
13. A three-stage dividend discount method
14. Stock valuation based on earnings
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15. Determinants of dividends
16. The information content of dividends
17. Accounting earnings versus economic earnings
18. Price-earning ratios
Lecture 7: Options (Week 13)
Readings : Ch. 14 and 15.1–15.3 and Lecture Notes 7.
Advanced Readings : Black and Scholes (1973), Merton (1973), Ross (1976b),
Cox, Rubinstein and Ross (1979), and Pindyck (1991)
1. Types of option contracts option trading
2. Valuation of options
3. The binomial option pricing model
4. The Black-Scholes model for call options
5. The valuation of put options
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STUDENT ACCOMMODATION
Students may request accommodation as a result of barriers related to disability, religious obligation, or any characteristic under the Nova Scotia
Human Rights Act. Students who require academic accommodation for either classroom participation or the writing of tests and exams should make their request to the Advising and Access Services Center (AASC) prior to or at the outset of the regular academic year. Please visit www.dal.ca/access for more information and to obtain the Request for Accommodation – Form
A.
A note taker may be required as part of a student’s accommodation.
There is an honorarium of $75/course/term (with some exceptions). If you are interested, please contact AASC at 494-2836 for more information.
Please note that your classroom may contain specialized accessible furniture and equipment. It is important that these items remain in the classroom, untouched, so that students who require their usage will be able to participate in the class.
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NEWS FROM THE WRITING CENTRE
Writing expectations at university are higher than you will have experienced at high school (or if you are entering a master’s or PhD program, the expectations are higher than at lower levels). The Writing Centre is a Student Service academic unit that supports your writing development. Make an appointment to discuss your writing. Learning more about the writing process and discipline-specific practices and conventions will allow you to adapt more easily to your field of study.
A new online Resource Guide at http://dal.ca.libguides.com/writingcentre offers information on writing resources including annotated writing models from a number of disciplines.
Dalhousie Writing Centre Main Location (Learning Commons, Main Floor)
• Monday & Tuesday 10am–07pm
• Wednesday & Thursday 10am–9pm
• Friday 10am–4pm
• Sunday 12noon–5pm
AT SEXTON (ROOM A108)
• Wednesday 6pm–9pm
• Friday 9am–12pm
AT BLACK STUDENT ADVISING (SUB ROOM 418)
• Monday 12noon–2pm
WELDON LAW LIBRARY (BASEMENT - ROOM 114 F)
• Wednesday 6pm-8pm
BOOK AN APPOINTMENT:
Email writingcentre@dal.ca or call 494-1963 or go to the Dalhousie homepage, log on to MyDal, and select the ”Learning Resources” tab. You will see the ”Writing Centre” BOOK AN APPOINTMENT button.
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DEPARTMENT OF ECONOMICS STATEMENT ON ACADEMIC INTEGRITY
At Dalhousie University, we respect the values of academic integrity: honesty, trust, fairness, responsibility and respect. As a student, adherence to the values of academic integrity and related policies is a requirement of being part of the academic community at Dalhousie University.
What does academic integrity mean?
Academic integrity means being honest in the fulfillment of your academic responsibilities thus establishing mutual trust. Fairness is essential to the interactions of the academic community and is achieved through respect for the opinions and ideas of others. “Violations of intellectual honesty are offensive to the entire academic community, not just to the individual faculty member and students in whose class an offence occurs.”
( http://ug.cal.dal.ca/UREG.htm#12)
How can you achieve academic integrity?
 make sure you understand Dalhousie’s policies on academic integrity: http://academicintegrity.dal.ca/Policies/
 do not submit an assignment or essay that is identical to an assignment or essay submitted by another individual or group
 give appropriate credit to the sources used in your assignment or essay
 do not download the work of another from the Internet and submit it as your own
 do not submit work that has been completed through collaboration or previously submitted for another assignment without permission from your instructor
 do not have someone else write an examination or test for you, or write an examination or test for someone else
What will happen if an allegation of an academic offence is made against you?
Instructors are required to report any suspected offence. The full process is outlined in the Discipline flow chart ( http://academicintegrity.dal.ca/Files/AcademicDisciplineProcess.pdf
) and includes the following:

Each Faculty has an Academic Integrity Officer (AIO) who receives allegations from instructors

The AIO decides whether to proceed with the allegation and you will be notified of the process

If the case proceeds, you will receive an INC (incomplete) grade until the matter is resolved

If you are found guilty of an academic offence, a penalty will be assigned ranging from a warning
to a suspension or expulsion from the University and can include a notation on your transcript,
failure of the assignment or failure of the course. All penalties are academic in nature.
Where can you turn for help?

If you are ever unsure about ANYTHING, contact your instructor.
 http:// academicintegrity.dal.ca
o Links to policies, definitions, online tutorials, tips on citing and paraphrasing
 http:// writingcentre.dal.ca
o Assistance with proofreading, writing styles, citations
 http:// www.library.dal.ca/How/ o Workshops, online tutorials, citation guides, Assignment Calculator, RefWorks
 http:// www.dsu.ca/Services/Advocacy o Assists students with academic appeals and student discipline procedures.

http:// senate.dal.ca
o List of Academic Integrity Officers, discipline flow chart, Senate Discipline Committee
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