Introduction to the Economics of Financial Markets

Introduction to the Economics of Financial Markets

Introduction to the Economics of Financial Markets

Introduction to the Economics of Financial Markets

Synopsis

There are many textbooks for business students that provide a systematic, introductory development of the economics of financial markets. However, there are as yet no introductory textbooks aimed at more easily daunted undergraduate liberal arts students. Introduction to the Economics of Financial Markets fills this gap by providing an extremely accessible introductory exposition of how economists analyze both how, and how well, financial markets organize the intertemporal allocation of scarce resources. The central theme is that the function of a system of financial markets is toenable consumers, investors, and managers of firms to effect mutually beneficial intertemporal exchanges. James Bradfield uses the standard concept of economic efficiency (Pareto Optimality) to assess the efficacy of the financial markets. He presents an intuitive, and introductory, understandingof the primary theoretical and empirical models that economists use to analyze financial markets, and then uses these models to discuss implications for public policy. Students who use this text will acquire an understanding of the economics of financial markets that will enable them to read, withsome sophistication, articles in the public press about financial markets and about public policy toward those markets. The book is addressed to undergraduate students in the liberal arts, but will also be useful for undergraduate and beginning graduate students in programs of businessadministration who want an understanding of how economists assess financial markets against the criteria of allocative and informational efficiency.

Excerpt

This book is an introductory exposition of the way in which economists analyze how, and how well, financial markets organize the intertemporal allocation of scarce resources. The central theme is that the function of a system of financial markets is to enable consumers, investors, and managers of firms to effect mutually beneficial intertemporal exchanges. I use the standard concept of economic efficiency (Pareto optimality) to assess the efficacy of the financial markets. I present an intuitive development of the primary theoretical and empirical models that economists use to analyze financial markets. I then use these models to discuss implications for public policy.

The book presents the economics of financial markets; it is not a text in corporate finance, managerial finance, or investments in the usual senses of those terms. The relationship between a course for which this book is written, and courses in corporate finance and investments, is analogous to the relationship between a standard course in microeconomics and a course in managerial economics.

I emphasize concrete, intuitive interpretations of the economic analysis. My objective is to enable students to recognize how the theoretical and empirical results that economists have established for financial markets are built on the central economic principles of equilibrium in competitive markets, opportunity costs, diversification, arbitrage, and trade-offs between risk and expected return. I develop carefully the logic that supports and organizes these results, leaving the derivation of rigorous proofs from first principles to advanced texts. (Some proofs and technical extensions are presented in appendices to some of the chapters.) Students who use this text will acquire an understanding of the economics of financial markets that will enable them to read with some sophistication articles in the public press about financial markets and about public policy toward those markets. Dedicated readers will be able to understand the central issues and the results (if not the technical methods) in the scholarly literature.

I address the book primarily to undergraduate students. The selection and presentation of topics reflect the author’s long experience teaching in the Department of Economics at Hamilton College. Undergraduate and beginning graduate students in programs of business administration who want an understanding of how economists assess financial markets against the criteria of allocative and informational efficiency will also find this book useful.

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