Investments: From Economics to Finance

Undergraduate / Graduate

This course studies finance and investments through the lens of economic equilibrium methods. We look at how the general equilibrium framework in economics gives rise to the factor pricing models in finance, the no-arbitrage framework in economics gives rise to the option pricing models in finance, and the Nash equilibrium framework in economics gives rise to the microstructure trading models in finance. Trillions of dollar worth of financial products ride on these financial models, and we trace the path from the basic models of equilibrium in economic theory to these applied models in finance that have found immense use in practice. The course combines a theoretical framework with applied analysis. Topics covered include: basics of general equilibrium with uncertainty, mean-variance utility, portfolio optimization, capital asset pricing model, no-arbitrage equilibrium, fundamental theorem of asset pricing, binomial option pricing, Black-Scholes-Merton options theory, Bayes Nash equilibrium, Kyle and Glosten-Milgrom models of trading.