Financial Syllabus

Financial Economics PRELIMINARY Syllabus

Central European University Lecturer: Adam Zawadowski Department of Economics Nador 11 Building, Room 404 Winter 2017 [email protected]

General Information

Course level: This is a PhD level course open to MA Economics students

Credits: 3 credits (6 ECTS credits)

Course Description

This course is designed to introduce you to the frontiers of research in financial economics. We will mainly focus on theoretical research in the areas of financial frictions, crises, liquidity, bub- bles, financial intermediation, and banking. The course will contain a mix of lectures and paper discussions. A firm background in is required.

Course Requirements and Assessment

Your letter grade will be assigned according to departmental guidelines and will depend on the homework and exam scores in the following way:

Midterm exam 20% Final exam 30% Referee reports 15% Homework 15% Participation 20%.

Preliminary course outline and reading list

Positions marked by (*) are optional.

1 Introduction to the Financial System

• Federal Reserve Board, Flow of Funds

2 Principles of classical finance

• John H. Cochrane. : Revised Edition. Princeton University Press, 2005

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3 Asset pricing under asymmetric information

• S. J. Grossman and J. E. Stiglitz. On the impossibility of informationally efficient markets. American Economic Review, 70(3):393–408, 1980

• Albert S Kyle. Continuous auctions and . Econometrica, pages 1315–1335, 1985

• Lawrence R Glosten and Paul R Milgrom. Bid, ask and transaction in a specialist with heterogeneously informed traders. Journal of financial economics, 14(1):71–100, 1985

4 Debt

• R. Innes. Limited liability and incentive contracting with ex ante action choices. Journal of Economic , 75:45–67, 1990

• Zhiguo He and Wei Xiong. Dynamic debt runs. Review of Financial Studies, 25(6):1799–1843, 2012

• Markus K Brunnermeier and Martin Oehmke. The maturity rat race. The Journal of , 68(2):483–521, 2013

5 Intermediary capital

• Bengt Holmstrom and . Financial intermediation, loanable funds, and the real sector. the Quarterly Journal of economics, pages 663–691, 1997

• Markus K Brunnermeier and Yuliy Sannikov. A with a financial sector. The American Economic Review, 104(2):379–421, 2014

• Zhiguo He and Arvind Krishnamurthy. A model of capital and crises. The Review of Economic Studies, page rdr036, 2011

6 Banking

• Douglas W. Diamond and Philip H. Dybvig. Bank runs, deposit insurance and liquidity. Journal of Political , 91(3):401–419, 1983

7 Limits to

• and Robert W. Vishny. The limits of arbitrage. Journal of Finance, 52(1):35– 55, 1997

• Albert S. Kyle and Wei Xiong. Contagion as a wealth effect. The Journal of Finance, 56(4):1401–1440, 2001

• Peter Kondor. in dynamic arbitrage: the effects of trading. The Journal of Finance, 64(2):631–655, 2009

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8 Collateral

• . The cycle. In NBER Annual 2009, Volume 24, pages 1–65. University of Chicago Press, 2010

• Ana Fostel and John Geanakoplos. Leverage cycles and the anxious economy. The American Economic Review, 98(4):1211–1244, 2008

• Alp Simsek. Belief disagreements and collateral constraints. Econometrica, 81(1):1–53, 2013

9 The

• Gary Gorton and Andrew Metrick. Getting up to speed on the financial crisis: A one-weekend- reader’s guide. Journal of Economic Literature, 50(1):128–150, 2012

• Markus K Brunnermeier. Deciphering the liquidity and credit crunch 2007–2008. The Journal of economic perspectives, 23(1):77–100, 2009

• Markus K. Brunnermeier and Lasse Heje Pedersen. Market liquidity and funding liquidity. Review of Financial Studies, 22(6):2201–2238, 2009

• Richard Stanton and Nancy Wallace. The bear’s lair: credit default swaps and the subprime mortgage crisis. Review of Financial Studies, 24(10):3250–3280, 2011

10 Liquidity

• Lawrence R Glosten and Paul R Milgrom. Bid, ask and transaction prices in a specialist market with heterogeneously informed traders. Journal of financial economics, 14(1):71–100, 1985

• Bengt Holmstr¨omand Jean Tirole. Private and public supply of liquidity. Journal of , 106(1):1–40, 1998

• Darrell Duffie, Nicolae Gˆarleanu, and Lasse Heje Pedersen. Over-the-counter markets. Econo- metrica, 73(6):1815–1847, 2005

• Gary Gorton and George Pennacchi. Financial intermediaries and liquidity creation. Journal of Finance, 45(1):49–71, 1990

• Martin Oehmke and Adam Zawadowski. Synthetic or real? the equilibrium effects of credit default swaps on bond markets. Review of Financial Studies, 28(12):3303–3337, 2015

11 Bubbles and Crashes

• J Bradford De Long, Andrei Shleifer, Lawrence H Summers, and Robert J Waldmann. risk in financial markets. Journal of political Economy, pages 703–738, 1990

• Dilip Abreu and Markus K. Brunnermeier. Bubbles and crashes. Econometrica, 71(1):173– 204, 2003

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12 Interconnectedness

• Franklin Allen and . Financial contagion. Journal of Political Economy, 108(1):1– 33, 2000

• Joseph E Stiglitz. Risk and global economic architecture: Why full financial integration may be undesirable. NBER working paper, 2010

• Adam Zawadowski. Entangled financial systems. Review of Financial Studies, 26(1):1291– 1323, 2013

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