London School of Economics and Political Science (LSE)

Modules

142 Quantitative finance

Prerequisites

If taken as part of a BSc Degree, 66 Microeconomics and 20 Elements of econometrics.

Other rules

This unit must be taken at the same time as or after 92 Corporate Finance.

Aims and objectives

This unit is aimed at students interested in obtaining a thorough grounding in market finance and related empirical methods. It provides the econometric techniques, such as time-series analysis, required to analyse theoretical and empirical issues in finance. It provides applications in asset pricing, investments, risk analysis and management, market microstructure, and return forecasting.

Learning outcomes

On completion of this unit, students should:
• have mastered the econometric techniques required in order to analyse issues in asset pricing and market finance
• be familiar with recent empirical findings based on financial econometric models
• have gained valuable insights in the functioning of financial markets
• understand some of the practical issues in the forecasting of key financial market variables, such as asset prices, risk and dependence.

Syllabus

Building on concepts introduced in unit 92 Corporate finance and unit 20 Elements of econometrics, this unit introduces econometric tools related to time-series analysis and applies them to study issues in asset pricing, investment theory, risk analysis and management, market microstructure, and return forecasting.

Topics addressed by this unit are:

* Concepts and measures of risk
* Time-series analysis
* Empirical tests of the Capital Asset Pricing Model (CAPM) and Arbitrage

Pricing Theory (APT)

* Market risk models
* Models of financial market correlations and dependence
* Data mining and technical trading
* Risk management
* Asset allocation decisions

This unit is quantitative by nature. It aims however to investigate practical issues in the forecasting of key financial market variables and makes use of a number of real-world data sets and examples.

Essential reading

Christoffersen, P.F. Elements of Financial Risk Management. (Academic Press, London, 2003) [ISBN 0121742326].
Diebold, F.X. Elements of Forecasting. (Thomson South-Western, Canada, 2006) fourth edition [ISBN 032432359X].

Assessment

This unit is assessed by a three hour unseen written examination.
All information in this document is subject to confirmation in the Programme Regulations for degrees and diplomas in Economics, Management, Finance and the Social Sciences that are
reviewed annually. Notice is also given in the Regulations of any units which are being phased out and students are advised to check unit availability.