Financial economics

Financial economics is a branch of economics that studies the interrelation of financial variables, such as prices, interest rates and shares, as well as the behavior and efficiency of financial markets. Financial economics is primarily concerned with building models to derive testable or policy implications from acceptable assumptions.

Overview

Financial economics is a discipline that is concerned with the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment. It is built on the foundation of microeconomics and decision theory.

Financial markets

Financial markets are a key area of focus in financial economics. These markets, including the stock market, bond market, and commodity market, facilitate the exchange of different types of financial assets. Financial economists study these markets and may use price discovery, transaction costs, and institutional details as inputs into their models.

Financial instruments

Financial economics also studies the different types of financial instruments, which are claims to the cash flows generated by households and firms. These instruments include stocks, bonds, derivatives, and currency.

Financial institutions

Financial institutions, such as banks and insurance companies, are also a major focus of financial economics. These institutions play a crucial role in the economy by channeling funds from savers to borrowers and by helping to spread risk.

Financial risk management

Financial risk management is a key aspect of financial economics. This involves the use of financial instruments to control exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc.

See also

• Investment theory
• Portfolio theory
• Capital asset pricing model
• Arbitrage pricing theory
• Efficient-market hypothesis

External links

• Journal of Financial Economics

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  Markowitz efficient frontier

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  Capital Market Line plot

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  Security Market Line chart

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  Stock price simulation

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  Pareto Efficient Frontier for the Markowitz Portfolio selection problem

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  Four Correlations

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  Binomial tree for real options

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  Volatility smile

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  Financial economics