30177 - FINANCIAL MODELLING
Course taught in English
Go to class group/s: 31
An intermediate level of Excel knowledge is required. Students with a basic knowledge are expected to fill their gaps before starting the course. Several Excel user manuals can come handy, for instance: M.MILLER, "Idiot's Guides: Microsoft Excel 2013", Penguin Group, 2014. Students are recommended to have exposure to calculus (series and progressions, exponents and logarithms, derivatives, unconstrained and constrained optimization), linear algebra (systems of linear equations, matrix algebra), statistics (multiple random variables, moments, hypothesis testing). References for calculus and linear algebra: chapters 2-9, 16-18 in C.P.SIMON, L.BLUME, "Mathematics for Economics", Norton & Company, 1994. References for statistics: chapters 2-3, 5, 7, 9, 11-12 in P. NEWBOLD, W.L. CARLSON, B. THORNE, "Statistics for Business and Economics", Pearson/Prentice Hall, 8th edition. Prior exposure to econometrics is beneficial, although not essential.
The course provides the technical skills for implementing asset pricing and investment models with Excel. Students are equipped with the basic operational tools to understand financial markets and employ the modelling abilities developed via sample applications to build their own models. Coursework mainly focuses on functions already embedded in the worksheet as well as on procedures designed to solve specific problems. The course concentrates on the application of several theoretical models for financial valuation, optimal portfolio choice and performance evaluation.
- Tools: introduction to Excel (array, financial and statistical functions) and add-ins (Solver and Data Analysis).
- Mean-variance portfolio choice: efficient frontier with and without shortselling constraints.
- Bonds: duration, immunization and the term structure of interest rates.
- Stocks: CAPM, beta estimation and the security market line; APT and multi-factor models.
- Options: binomial model, lognormal distribution and Black-Scholes model.
- Further topics: event study, style analysis.
- Identify the quantitative models and methods for pricing financial assets.
- Identify the quantitative models and methods for portfolio formation in order to mitigate risk.
- Build a portfolio of bonds that minimizes interest rate risk (immunization).
- Build a portfolio of stocks (w/o and with constraints) that is optimal in the mean-variance sense.
- Build a portfolio of options that allows to profit from future movements in the underlying asset's value.
- Face-to-face lectures
- Exercises (exercises, database, software etc.)
Exercises include Excel worksheets to analyse asset pricing and portfolio investment based on real world data. Until on-campus teaching resumes, this course is meant to be bring-your-own-device. Students must make sure their devices are equipped with a wroking version of Excel including the following add-ins: Analysis ToolPak and Solver Add-in.
|Continuous assessment||Partial exams||General exam|
Written exam consists of open-ended questions/exercises aimed to assess students' ability to apply quantitative methods to the pricing of financial assets and to portfolio formation for both hedging/risk mitigation (e.g. bond portfolio immunization, mean-variance optimization) and speculation (e.g. directional and non-directional options strategies) purposes. Detailed format: closed books 60 minutes.
- S. BENNINGA, Financial Modeling, MIT Press, 2022, 5th Edition.
- Lecture slides and Excel spreadsheets uploaded on Blackboard as the course progresses.