Risk & Fluctuations in Financial Markets

PREREQUISITES: ECON-UA 11, ECON-UA 13, and ECON-UA 266

The 2008 global financial crisis and continuing market volatility have attracted widespread attention to the factors driving price fluctuations and the challenges of measuring risk in stock and other asset markets. Two approaches have dominated the discussion: rational expectations and behavioral finance. This course will present these two approaches in a way that is accessible to advanced undergraduates and introduce students to a third: imperfect knowledge economics, which recognizes limits to what market participants can possibly know. In addition to reviewing standard econometric tools taught in most university courses, students will learn to make use of survey data. The course develops a structured way to code information contained in these narrative reports with the aim of bridging the gap between the models and the activity of actual market participants. The course concludes with a discussion of the implications of alternative theoretical approaches and empirical evidence for the reform of the financial system aiming to limit its vulnerability to future crisis.