UNIVERSITY OF CALIFORNIA Department of Economics

Econ 136 Course Outline Spring 2014

Economics 136: Financial Economics

Instructor: Raymond J. Hawkins (hawkins@econ.berkeley.edu) This course is an introduction to nancial economics. We will cover the theory and analytical tools used to make investment decisions as well as paradigms of security valuation. Important themes in the course include risk, return, arbitrage and diversication. Financial economics is a quantitative subject. Calculus, statistics, and microeconomics are prerequisites. We will use calculus, statistics and analytical tools developed during the course. Use of a spreadsheet package like Excel will be important for the homework assignments. Requirements The course requirements are (i) ten graded problem sets, (ii) two midterm exams, and (iii) a nal exam. Some of the problem sets will involve data work. Your course grade will be determined as follows: Problem Sets 20% Midterms 40% (20% each) Final 40% The rst midterm will be in class on Wednesday February 26; the second midterm will be in class on Wednesday April 2. The nal exam will be from 3:00-6:00 p.m. on Friday May 16 at a location yet to be determined. Meeting Times, Discussion Sections and GSIs The class will meet for lectures on Mondays and Wednesdays from 5:307:00 in 100 GPB (Genetics and Plant Biology Building). In addition, sections will meet once a week for one hour. The GSIs for this course are Tom Beckford (tom.beckford@berkeley.edu), Mena Boyadzhiev (mkboyadzhiev@berkeley.edu), and Xiaoding Zhuo (xdzhuo@berkeley.edu). Sections will review background material, explain computational & analytical techniques, and extend & amplify concepts introduced in the lectures. The GSIs will also hold weekly oce hours. Your rst point of contact for questions regarding course material is your GSI. If the sections or meetings with the GSIs do not resolve your questions, you are welcome to stop by my oce (675 Evans) during oce hours (Tuesday and Thursday from 4:005:00) or at other times by appointment. Texts and Other Reading The textbook for the course is Investments by Zvi Bodie, Alex Kane and Alan Marcus. Readings will also be assigned from journal articles (cf. Course Outline below) as well as
Spring 2014 Page 1 of 7

UNIVERSITY OF CALIFORNIA Department of Economics

Econ 136 Course Outline Spring 2014

Manias, Panics, and Crashes: A History of Financial Crises by Charles Kindleberger and Robert Aliber. I will reference the latest editions, but do not require that you use that particular edition. I will assign readings and expect that you will read the material as the course proceeds. Other works that you may nd interesting include: Continuous-Time Finance by Robert Merton. Expected Returns: An Investors Guide to Harvesting Market Rewards by Antti Ilmanen (available for free download at www.cfapubs.org). This is a condensed version of his book Expected Returns on Major Asset Classes. Fixed Income Securities: Tools for Todays Markets by Bruce Tuckman and Angel Serrat. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset by Aswath Damodaran. Lecture slides will be posted on the bSpace course website. Learning Goals As part of Berkeleys Undergraduate Student Learning Initiative (USLI), the Economics Department has developed learning goals for the Economics major. The learning goals for this course include Critical Thinking Skills: CT1: Apply economic analysis to evaluate everyday problems; CT2: Apply economic analysis to evaluate specic policy proposals; CT3: Compare two or more arguments that have dierent conclusions to a specic issue or problem; CT4: Understand the role of assumptions in arguments. Quantitative Skills: QT1: Understand how to use empirical evidence to evaluate an economic argument; QT2: Interpret statistical results; QT3: Conduct appropriate statistical analysis of data, and explain the statistical problems involved. Problem Solving Skills: PS1: Solve problems that have clear solutions; PS2: Propose solutions for problems that do not have clear answers, and indicate under what conditions they may be viable solutions. Specialized Knowledge in elds: SP1: In specic content areas (elds) of economics, develop deeper critical and quantitative thinking skills and apply problemsolving skills to complex problems.

Spring 2014

Page 2 of 7

UNIVERSITY OF CALIFORNIA Department of Economics

Econ 136 Course Outline Spring 2014

Communication Skills: CS1: Communicate eectively in written, spoken, and graphical form about specic economic issues; CS2: Formulate a well-organized written argument that states assumptions and hypotheses, which are supported by evidence. Lifelong Learning Skills: LL2: Know how to locate and use primary data sources (e.g., BLS Household Survey, UN Human Development Index). LL3: Understand and evaluate current economic events and new economic ideas. Course Outline 1. Introduction: Capital structure, risk and derivatives. Overview of nancial markets. Return, probability and risk. Reading: Bodie, Kane and Marcus (BKM) Chapters 1-3 and 5. Selections from X. Gabaix, Power Laws in Economics and Finance, Annual Review of Economics, 1, 255293 (2009). 2. Derivatives: Arbitrage and the Law of One Price. Covered Interest Arbitrage. Futures, options, synthetic derivatives and hedging. Put-call parity and the BlackScholes-Merton model. Reading: BKM Chapters 20-22 and 23.1. 3. Fixed Income: The time value of money. Valuation of zero-coupon and coupon bonds. The term-structure of interest rates. Corporate bonds. Credit. Mortgages and mortgage-backed securities. Interest-rate swaps. Deposit Insurance. Reading: BKM Chapters 14, 15 and 16.1-16.3. 4. Market Instability and the Financial Crisis: Keynes on the trade cycle. Minsky and the Financial Instability Hypothesis. Reading: J.M. Keynes, The General Theory of Employment, The Quarterly Journal of Economics 51, 209223 (1937). H.P. Minsky, The Financial Instability Hypothesis: An Interpretation of Keynes and an Alternative to Standard Theory, Nebraska Journal of Economics & Business 16, 516 (1977). Kindleberger & Aliber Chapters 1 & 2. 5. Equities: The dividend discount model. The Gordon growth model. Return on equity. Reading: BKM Chapter 18. 6. Portfolios: The Capital Asset Pricing Model (CAPM): Mean-variance analysis & diversication. Empirical and conceptual impact of the CAPM. Multifactor Models and Arbitrage Pricing Theory. The Ecient Market hypothesis. Mispricing and behavioral nance. Reading: BKM Chapters 4,5-12. Disclaimer This syllabus is a living document and subject to revision. Whenever the syllabus is revised it will be posted to bSpace and an email will be sent to all class participants informing them of the posting and indicating what has been revised. This version of the syllabus was generated on January 22, 2014.
Spring 2014 Page 3 of 7

UNIVERSITY OF CALIFORNIA Department of Economics

Econ 136 Course Outline Spring 2014

Important Class Policies 1. Attendance will generally not be taken in class. You need not contact me or your GSI if you will miss class. There will be no unannounced quizzes. However, much of the mid-term and nal exam material will be based on lectures and discussions in class. 2. Personal electronics: Laptops should not be open in class. They are distracting to those around you. Cell phones should be silenced or in vibrate mode: preferably o. Texting during the lecture should be kept to an absolute minimum. 3. Email. Your rst point of contact for questions regarding course material is your GSI. I am available to answer questions about course policy and course material. Please put Econ 136 somewhere in the subject line so your email is routed correctly. I will try to respond within 48 hours of receiving your email. 4. Code of Ethics. You are expected to know the Berkeley Campus Code of Conduct and to conduct yourself in this class accordingly. In particular, all forms of academic misconduct including but not limited to cheating, fabrication, plagiarism, or facilitating academic dishonesty will not be tolerated. Please review the denitions of cheating posted at The Center for Student Conduct. Any evidence of cheating will result in a score of zero (0) on that assignment or exam. Cheating on the nal exam will result in an F for the course. Incidences of cheating will also be reported to Student Judicial Aairs. 5. Honor Code. The student community at UC Berkeley has adopted the following Honor Code: As a member of the UC Berkeley community, I act with honesty, integrity, and respect for others. This is new this year. The new Honor Code, as distinct from the Student Code of Conduct, is intended to provide a vehicle for campus-wide awareness and discussion of issues of academic integrity. In the coming months you will notice mention of the Honor Code in a number of contexts, including student orientation and signage in classrooms. You can nd more information on the Honor Code website created by the ASUC, complete with FAQs. 6. Problem sets are due no later than the beginning of class on the due date. You must submit your own work. Copied problem sets will receive a score of zero (0). Graded problem set will be returned in your discussion sections.

Spring 2014

Page 4 of 7

UNIVERSITY OF CALIFORNIA Department of Economics

Econ 136 Course Outline Spring 2014

7. DSP exam accommodation. If you are entitled to special accommodation on exams let me know as soon as possible; preferably no later than the end of the second week of the semester. 8. Missed Exams. There are no make-up exams. If you miss a midterm you must contact me before the exam with an excuse that meets University standards.1 Please be prepared to provide documentation to support your excuse. If you do not have an appropriate, documented excuse for an exam you will receive a zero (0) for that exam. If you miss the nal with an excuse that meets University standards you will receive an incomplete for the course and will be required to take the nal for the course during the fall of 2014 in order to get credit for the class. Please take the necessary steps to ensure that you do not have travel plans that conict with the nal as this will not be considered an acceptable excuse for missing the nal. 9. Exam regrade requests. The GSIs take great care in grading exams. If you believe there was an error in adding up the point on your exam, simply point this out to your GSI at the end of section when you receive your exam back. If you believe there to be an error in the grading of your exam, here are the steps you must follow: (a) Within 7 days of the time that the exams are rst returned, give your GSI your exam and a written (i.e. word processed) request listing the question(s) you think should be regraded and an explanation of why. (b) Your GSI reserves the right to regrade your entire exam, not just the question(s) mentioned in your regrade request. Scores on any question can be changed (increased or decreased). It is possible for you to end up with fewer points at the end of the regrade than you had originally. (c) I have advised the GSIs to reject an regrade request that is for fewer than 3 points per question. 10. Course Grading. Your course letter grade will be determined solely from the weightedaverage percentage of your graded assignments & exams using a curve. Your nal exam will be held by the economics department for 12 months. Final exams cannot be reevaluated once grades are submitted to the Registrars Oce. You can look at your graded exam in 508-1 Evans Hall, generally beginning about 3 weeks after the end of the semester.
Religious holidays not recognized by the University must accompanied by a letter from a religious leader. Schedules for ocial team events must be provided to me by the end of the second full week of the semester. A death in the family must be documented. Illness or injury must be accompanied by a note from a physician or clinic, on their letterhead. The Tang Center can provide you with documentation.
1

Spring 2014

Page 5 of 7

UNIVERSITY OF CALIFORNIA Department of Economics

Econ 136 Course Outline Spring 2014

11. P/NP Option. Students taking the course under the P/NP option must earn at least a C to pass the course. Important Campus Policies and Guidelines 1. ACCOMMODATION OF RELIGIOUS CREED In compliance with Education code, Section 92640(a), it is the ocial policy of the University of California at Berkeley to permit any student to undergo a test or examination, without penalty, at a time when that activity would not violate the students religious creed, unless administering the examination at an alternative time would impose an undue hardship that could not reasonably have been avoided. Requests to accommodate a students religious creed by scheduling tests or examinations at alternative times should be submitted directly to the faculty member responsible for administering the examination by the second week of the semester. Reasonable common sense, judgment and the pursuit of mutual goodwill should result in the positive resolution of scheduling conicts. The regular campus appeals process applies if a mutually satisfactory arrangement cannot be achieved. The link to this policy is available in the Religious Creed section of the Academic Calendar webpage. 2. CONFLICTS BETWEEN EXTRACURRICULAR ACTIVITIES AND ACADEMIC REQUIREMENTS The Academic Senate has established Guidelines Concerning Scheduling Conicts with Academic Requirements to address the issue of conicts that arise between extracurricular activities and academic requirements. They specically concern the schedules of student athletes, student musicians, those with out-of-town interviews, and other students with activities (e.g., classes missed as the result of religious holy days) that compete with academic obligations. The guidelines assign responsibilities as follows: It is the instructors responsibility to give students a schedule, available on the syllabus in the rst week of instruction, of all class sessions, exams, tests, project deadlines, eld trips, and any other required class activities. It is the students responsibility to notify the instructor(s) in writing by the second week of the semester of any potential conict(s) and to recommend a solution, with the understanding that an earlier deadline or date of examination may be the most practicable solution. It is the students responsibility to inform him/herself about material missed because of an absence, whether or not he/she has been formally excused.

Spring 2014

Page 6 of 7

UNIVERSITY OF CALIFORNIA Department of Economics

Econ 136 Course Outline Spring 2014

The link to the complete guidelines is available on the Academic Senate website. A useful checklist to help instructors and students comply with the policy is available on the Oce of Educational Development website. 3. READING, REVIEW, RECITATION (RRR) WEEK In Fall 2009, the campus instituted a Reading, Review, Recitation (RRR) period before nal exams. For the coming semesters, please keep these dates in mind: In Spring 2014, classes end on Friday, May 2, 2014. RRR Week will take place between the last day of classes (May 2) and the rst day of the nal exam period (May 12, 2014). RRR Week is intended to provide students time to prepare for exams, to work on papers and projects, and to participate in optional review sessions and meetings with instructors. Presentations of capstone projects, oral presentations, and performances are permitted, although exibility in scheduling may be required to accommodate students individual schedules. The introduction of new material is not permitted. Mandatory exams or quizzes and other mandatory activities are also not permitted, with some very limited exceptions (capstone presentations, for example). Please keep in mind that nal exams and papers or projects substituting for nal exams may not be due before the nal exam week. Detailed, updated guidelines on permissible organized activities during the RRR week are available on the Oce of the Registrars website. In addition, the Oce of Educational Development has prepared some suggestions on making RRR week productive for instructors and students. If you have tips or ideas you would like to have added to this page, please contact the Oce of Educational Development. 4. COMMENCEMENT CEREMONIES AND FINAL EXAMS In Spring 2010, the campus instituted a new policy that graduation ceremonies must take place after the conclusion of nal examinations, with the exception of professional school ceremonies with graduate students only. For Spring 2014, nal exams end at 10 pm on Friday, May 16, 2014. In Spring 2014, the Graduates Convocation will be held Saturday May 17, 2014. For more information, please see the Commencement Convocation Events Oce website.

Spring 2014

Page 7 of 7