Markets and Institutions

Introduction

Financial markets are instrumental to the workings of the economy. However, these markets do not exist in a vacuum but evolve from the interactions of market participants within the boundaries of market institutions. Financial markets have grown in importance and globalized over time linking investors and institutions across borders. Digitalization and other rapid innovations in technology increase the complexity of the financial environment. This, together with the recent financial crisis, has brought into light the necessity to understand how financial markets actually work.

The course focuses on the mechanisms by which securities are traded in modern financial markets and the implications of trading mechanisms for the efficiency and liquidity of markets. It treats theoretical and empirical work on trading mechanisms and market outcomes and shows how it helps explaining actual events. The course closes with the discussion of some topical issues for financial markets (including digitalization) that transformed the way its participants interact.

Course content

1. Overview of the financial system. Why do we have financial markets? Consumption smoothing and risk-sharing.

2. Fundamental principles of finance. Efficient market hypothesis and no arbitrage.
3. Risk and return. CAPM and multifactor models.
4. Different markets and instruments. Primary and secondary markets (IPOs, SEOs, rights issues). Secondary markets and liquidity.
5. Interest rates.
6. Different participants and their roles. Intermediation.
7. Delegated portfolio management. Active vs. passive investment.
8. Globalization of the financial system. Financial crises.
9. Topical issues and controversies in financial markets (e.g., digitalization, high-frequency trading, electronic trading platforms).