A83010 Applied Financial Modelling

At the end of the course a student will be able

- to build and interpret financial models,

- to perform financial calculations,

- to carry out statistical and empirical procedures

that come in useful in the fields of financial analysis and portfolio management.

In addition, he/she will be familiar with data, operational rules, and procedures used in those fields.

Finally, he/she will have a deeper understanding of financial contracts and markets.

This course concerns the application of scientific tools to investment and funding activities. It deals with some validated quantitative models and processes that support decisions in such fields as

- the comparison of banking and near banking transactions, e.g. a time deposit, a repurchase agreeement, a home mortgage loan, a lease of vehicles, plant, and equipment;

- the appraisal and comparison of real investment projects;

- the management of portfolios according to the requirements in terms of liquidity, diversification, income/growth, risk/return, e.g. a private portfolio, an endowment fund, or a mutual fund.

As for the investment activity, the course provides a technical overview and lets students get accustomed to some of its procedures, which are usually computer-based. To strengthen the link with professional practice, emphasis is placed on data, quantitative models, statistical and empirical estimation procedures that are used or taken into consideration by financial analysts and portfolio managers. As a consequence, students will learn what to analyse and how to approach a financial problem, especially in connection with stocks and bonds. This is essential for understanding in depth such operative issues as

- how to detect mispriced stocks or bonds, i.e. how to pick stocks and bonds effectively;

- how to obtain the greatest possible return from a financial portfolio with a given degree of risk.

All the relevant aspects of a financial problem are taken into account through a problem-oriented and hence multidisciplinary approach. Therefore,

- reference is made to the theoretical principles and practical notions of other related subjects, such as accounting, industrial economics, and applied statistics;

- attention is paid to the empirical evidence on US financial markets, their workings and anomalies;

- use may be made of an electronic spreadsheet to carry out the various financial procedures.

The main findings of relevant empirical studies are consistently reported. Different topics are taken into consideration, including the relationship between current forward rates and future spot rates, the performance of corporate bonds, the dissimilar behaviour of growth and value stocks, long-term mean reversion and heteroskedasticity of US stock returns, the performance of equity mutual funds.

To take this course, students must be familiar with mathematics (basics of calculus and optimisation), statistics (sample statistics and their distributions, hypothesis testing, multiple linear regression) and accounting (reclassified financial statements, main accounting ratios). Knowledge of the financial system (markets and intermediaries as institutions and their functions, financial contracts and their use) is very helpful.

Individual active learning is needed on the basis of 1-2 hours per week, so as to keep up with all lesson and practical sessions (8 ECTS, 50 contact hours or so). As personal advice is likely to be needed as well, each student should meet the lecturer at least once during office hours.

Teaching is based on lectures and practical sessions, which can be computer based. Class attendance and active involvement are strongly recommended and graded.

After completing both individual and communal homework during the course, attenders will take a closed-book written exam at the end of the course. The exam for the remaining students is oral. Whether the final exam is written or oral, a pocket calculator is needed. Attenders can’t register for the exam, unless they have filled in an anonymous questionnaire on the course. Non-attenders may contact their lecturer for advice on how to go about this subject.