Economics of Finance - ECON3107

Faculty: Australian School of Business

School: School of Economics

Course Outline: ECON3107 Course Outline

Campus: Kensington Campus

Career: Undergraduate

Units of Credit: 6

EFTSL: 0.12500 (more info)

Indicative Contact Hours per Week: 3

Enrolment Requirements:

Prerequisite: ECON2101

CSS Contribution Charge: 3 (more info)

Tuition Fee: See Tuition Fee Schedule

Further Information: See Class Timetable

View course information for previous years.


Provides a treatment of the microeconomic foundations of modern finance. Many valuation or pricing formulas in modern finance are derived from the requirement that arbitrage profits are non-existent in properly functioning capital markets. The aim of the course is to show that the valuation formulas used in modern finance can also be derived from the microeconomic theory of markets in general equilibrium. Begins with a discussion of how economics agents make decisions when some aspect of the economic environment in which they operate is uncertain. This entails a discussion of expected utility theory and stochastic dominance, which form the cornerstone of modern financial economics. Asset pricing models are developed within the context of general eqilibrium portfolio choice problems. The notion that uncertainty in the economic environment can be dealt with by the introduction of state-contingent securities and that these securities lead to efficient market outcomes is fully discussed. The micoreconomic theory underlying the determination of firms' value is developed. This leads to a discussion of the Modigiliani-Miller proposition that the capital structure of the firm is irrelevant in determining its value. The course concludes with a discussion of the implications of informational asymmetrics for financial theories, with particular emphasis on insurance markets.
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