Introduction to the Economics of Financial Markets

James Bradfield



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 to enable 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, understanding of 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, with some 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 business administration who want an understanding of how economists assess financial markets against the criteria of allocative and informational efficiency.

Table of Contents

Part I: Introduction
1. The Economics of Financial Markets
2. Financial Markets and Economic Efficiency

Part II: Intertemporal Allocation by Consumers and Firms When Future Payments are Certain
3. The Fundamental Economics of Intertemporal Allocation
4. The Fisher Diagram for Optimal Intertemporal Allocation
5. Maximizing lifetime utility in a firm with many shareholders
6. A Transition to Models in which Future Outcomes Are Uncertain

Part III: Rates of Return as Random Variables
7. Probabilistic Models

Part IV: Portfolio Theory and Capital Asset Pricing Theory
8. Portfolio Theory
9. The Capital Asset Pricing Model
10. Multifactor Models for Pricing Securities

Part V: The Informational Efficiency and the Allocative Efficiency of Financial Markets: The Concepts
11. The Efficient Market Hypothesis
12. Event Studies

Part VI:The Informational and Allocative Efficiency of Financial Markets: Applications
13. Capital Structure
14. Options
15. Futures Contracts
16. Insider Trading
17. Summary and Conclusions



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