# III Term: April - June

In the third term each student will have the opportunity to choose among a number of courses offered in the Program. Each of the third term courses lasts four weeks, and counts as half of any of the other courses when the final grade is calculated.

### Derivatives

Forward contracts. Futures contracts. Options. Other derivatives. Hedging strategies using futures: minimum variance hedge ratio. Stock index futures. Interest rate markets: zero rates, bond pricing, forward rates, forwards rates agreements. Theories of term structure. Treasury bond futures. The LIBOR zero cure. Duration, duration based hedging strategies. Swaps: swap quotes and LIBOR zero rates, valuation of interest rate swaps, valuation of currency swaps. Mechanics of option markets: specification of stock options, trading commissions and margins, taxation. Warrants, executive stock options and convertibles bonds. Properties of stocks options: factors affecting options prices, put-call parity, effect of dividends. Trading strategies involving options: strategies involving a single option and a stock, spreads, combinations. Binomial trees: risk neutral valuation. Models of behaviour of stock prices: Markov property, continuous time stochastic process, process for stock prices, Itô’s Lemma. Lognormal property of stock prices. Distribution of the rate of return. Derivation of the Black-Scholes-Merton differential equation, Black-Scholes pricing formula, cumulative normal distribution functions, options pricing formulas. Currency options. “The Greeks”: Delta, Theta, Gamma, Rho, Vega.

Bibliography:
• John C. Hull, "Options futures and other derivatives", Prentice Hall, 2005.

### Time Series Econometrics

The main purpose of the course is to provide an introduction to estimation ant testing of dynamic causal effect. The pre-requisites include a good knowledge of the OLS estimator under classical assumption and a basic knowledge of the IV estimator.

Intoduction: review of OLS and finite sample results. Conditional density function, Strict Exogeneity, Conditional homoschedasticity, Absence of conditional serial correlation, Gauss-Markov theorem, Frisch-Waugh theorem, Testing hypothesis about population parameters.

Basic concepts for time series econometrics: DGP, Sequential factorization, Serial correlation, Distributed lag model, Dynamic causal effect, Method of Moments estimator and GMM, Deterministic trend, Filter, Structural change an Chow rtest.

Single equation models: OLS and large sample results: Stationarity, Ergodicity, Martingale Sequence, Limit theorems, Limit distribution of OLS for stationary stochastic process, Complete dynamic specification, Mean trend process, Econometric models with serially correlated errors. A loook at instumental variable regression: OLS versus IV for large sample, The 2SLS estimator, Hausman test, Sargan-Hansen test. Covariance-stationary process: Impulse response function, Wold decomposition theorem, VAR - Dynamic causal effect for equation system, Structural interpretation of VAR.

Introduction to non-stationary process: Unit root process, Dickey-Fuller test, Cointegration.

Bibliography:

• Hayashi Fumio, "Econometrics" (2000), Princeton University Press

### Business Analysis and Evaluation

This course introduces and develops an economic framework for business analysis and valuation. This framework covers key valuation components such as financial accounting data, business strategy and cash flows. The framework is then applied to a variety of decision contexts including valuation, mergers and acquisitions, and private equity deals. Each of the topics introduced in this course covers both institutional details and results of relevant academic research. It is furthermore supported by case studies.

The course should thus appeal to students intereseted in equity research, corporate finance, business strategy and private equity

The course is primarily based on lecture notes, articles and readings.

### Corporate Finance

Capital structure theory with symmetric information: valuation of the firm, M&M propositions, M&M with taxes, M&M with taxes and bankruptcy, Miller equilibrium, DeAngelo and Masulis model. Capital structure with asymmetric information: credit and equity rationing, role of collateral, optimal capital structure with agency costs. Corporate governance. Dividend policy theory: dividend indifference, types of dividend policy, tax effects, signalling theories of dividend policy. Initial Public Offerings: IPO underpricing.

Bibliography:
• Richard A. Brealey and Stewart C. Myers, "Principles of Corporate Finance", McGraw-Hill, 7th edition, 2003;
• Jean Tirole, "The Theory of Corporate Finance", 2005, Princeton University Press.

### Macroeconomics II

The course covers the basic real business cycle model and then moves to New-Keynesian models. It discusses the microeconomic foundations of nominal rigidities, analysing models of imperfect information and models of imperfect competition with menu costs and real rigidities. Finally, we discuss unemployment fluctuations and cycles driven by self-fulfilling expectations in non-walrasian models with coordiantion failures and multiple equilibria.

The course is composed of four parts.

- Part 1 covers the stylized of the business cycle

- Part 2 is devoted to real business cycle models.

- Part 3 covers the microfoundations of nominal rigidities, namely (i) imperfect information, (ii) imperfct competition and flexible prices, including the role of menu costs, (iii) imperfect competition and predetermined prices, (iv) imperfect competition and state-dependant pricing.

- Part 4 of the courseanalyses non Walrasian models that generate (i) strategic complementarities and multiple equilibria; (ii) unemployment fluctuations and labour market dynamics.

Bibliography:

• David Romer, "Advanced Macroeconomics", McGraw Hill 2006
• Fabio-Cesare Bagliano and Giuseppe Bertola, "Models for Dynamic Macroeconomics", Oxford University Press, 2004

### Portfolio Management: asset valuation and strategies

This course provides a rigorous treatment of advanced concepts of equity and fixed income investments. These are some (not all) of the major areas we will be looking at: Arbitrage and limits to arbitrage, hedge funds and their performance, equity premium and its evolution through time, asset pricing models (especially multi-factor models), methods to generate the yield curve asnd term structure of interest rates from real-life bonds, convexity and duration of bonds, bond investment strategies, bonds with embedded options, securitization and mortgage backed securities.

Bibliography:

• "Investments" by Bodie, Kane and Marcus
• "Bond Evaluation, Selection and Management" by Johnson

### Banking

Banking is an ever expanding field of theoretical and empirical research in economics. The purpose of the course is to provide an introduction to the economics theory of banking and to discuss some empirical issues. Pre-requisites are a basic knowledge of game theory, contract theory, industrial organization and econometrics. The course covers four main topics: the role and function of financial intermediaries; Bank-firm relationships; Credit market competition and bank stability; Bank regulation.

Bibliography:

• X. Freixas and J.J Rochet, Micoreconomics of Banking, the MIt press, second edition, 2008. Journal articles will be indicated during the course.

### Market Microstructure

The topic of the course is liquidity and price formation on securities markets. The structure and performance of prominent real-world securities markets is described and examined using relevant theory and evidence from the financial economics literature. The course focuses on stock market microstructure, that is, secondary market trading strategies and trading costs; how trading on stock exchanges is organized and regulated, and how this affects their functioning in terms of trading costs, international efficency, volatility and other measures of performance. The impact of differences in trading system architecture and regulatory policies is considered. Explicit attention is also given to the relationship between market liquidity and asset prices, highlighting the role of the liquidity of the secondary market in determining the cost of new capital.

The course is primarly based on lecture notes, articles and readings.

### Development Economics

The question of why some countries stagnate economically while others grow rapidly has long been one of most important questions in the field of Economics. It is now widely acknowledged that politics plays a central role in influencing growth. This has made the political economy of economic development one of the cutting edge areas of research in Political Science as well. The goal of this course is to familiarize students with the current frontiers of research in the political economy of development, taking full account of the multi-disciplinary nature of the field. Accordingly, the reading list primarily focuses on recent publications and working papers, which span the fields of Political Science as well as Economics.

The professor will provide the necessary historical context when required.

### Law and Economics

The course examines both traditional and current topics in the field of law and economics. Classes focus on existing legal theories and on their applications in economics, covering the economic analysis of legal institutions, property law, tort law and contract law. The purpose of the course is to provide students with basic concepts in the economic analysis of law, with specific focus on empirical legal studies and behavioral law and economics. The course is aimed both at students willing to pursue an academic career or to those interested in working in the consultancy industry or in regulatory authorities.

### Economic Theory

The first part of the course focuses on Consumption theory, testable restrictions (Slutsky matrix, Afriat's Theorem and GARP) and Collective Consumption Models. Furthermore, the course will also provide a brief overview of the Theory of General Economic Equilibrium from a differentiable approach and the Theory of Regular Economics. The second part of the course will introduce the Theory of Two-Sided Matching. It will analyze matching mechanisms for two sided market structures and study their main properties (e.g., stability, efficiency and strategy-proof).

Bibliography:

• Revealed Preference Theory, Christopher P. Chambers and Federico Echenique.
• Economics of the Family, Martin Browning, Pierre-André Chiappori, Yoram Weiss.
• Differential Topology and General Equilibrium with Complete and Incomplete Markets, Antonio Villanacci, Laura Carosi, Pierluigi Benevieri, Andrea Battinelli.
• Two-Sided Matching: A Study in Game-Theoretic Modeling and Analysi, Alvin E. Roth, Marilda A. Oliveira Sotomayor.
• Matching, Allocation, and Exchange of Discrete Resources, Tayfun Sönmez and M. Utku Ünver. HANDBOOK OF SOCIAL ECONOMICS

### Banking Regulation

Understanding the basics principles of banking regulation and supervision is central for everyone either targeting a career in a central bank or seeking a job in any credit institution. At the same time it could be relevant for students interested in banking and finance for research purposes. Purpose of the course is to give an overview of the current framework of the banking micro-supervision exploring its economic rationale, highlighting the pillars of the current framework and possibly its future evolution. Provided that risk management systems within credit institutions endogenously result from the interaction of banking regulations, active supervisions and business needs, an overview of the best practices expected and required to large and complex banks will be provided too. Course will be held by practitioners as most of the speakers have a background in banking supervision. Focus will be mostly on common practices rather than on theory. At the end of the course each student will have improved its understanding of the current framework for prudential regulation centered around capital requirements. At the same time they will have gained better comprehension of risk management practices within banks.

### Microeconometrics and Panel Data

We will study how microeconomic data on individual economic agents can be used to draw inferences on their behavior. The course will focus on the econometric methods that economists use for empirical microeconomic research. This will include the study of econometric models with limited dependent variables, models of selection and censoring. Particular emphasis will be given to the policy evaluation methods. The focus will primarily be on parametric models, but there will be some discussion of semi-parametric models. Along the way, we will discuss application of these models to economic data in contemporary empirical research. This will illustrate how microeconometric methods can be employed to answer real-world questions of economic interest.

Practical tutorials will be an essential part of this course. STATA will be the standard software both for practical tutorials and problem sets.

Bibliography:

• Jeffrey M. Wooldridge, Econometric Analysis of Cross Section and Panel Data, MIT Press, 2002.
• Richard Blundell and Monica Costa-Dias, “Alternative Approaches to Evaluation”, CEF.UP Working Paper No. 0805, 2008.
• Joshua Angrist and Joerg-Stephen Pischke, Mostly Harmless Econometrics, An Empiricist’s Companion, Princeton University Press, 2009.

### Auction Theory

The course introduces the main results of the economic literature on auctions, in order to provide an analytical framework for analyzing real-world auction markets. It discusses a number of practical applications that highlight the crucial elements of successful auction designs and bidding strategies. The course is designed for graduate students in economics and practitioners (economic consultants, regulators, central bankers, etc.) interested in understanding the design and functioning of auction markets.

References:

• Klemperer, P. (2004), “Auctions: Theory and Practice.” Princeton University Press.
• Krishna, V. (2002), “Auction Theory.” Academic Press.