FIN 602: Trading and Exchanges

Contents
Traditional asset pricing theory and investment analysis treat the process of price formation as a black box. The actual structure of financial markets does not play a role, and frictions and transaction costs are disregarded. These issues, and market liquidity in particular, are of enormous practical importance. This is evidenced by the great attention regulators pay to issues of financial market structure (e.g. the MiFID directive of the EU), as well as by the attention market participants pay to trading costs. In recent years, many new markets have been created in an attempt to reduce transaction costs (e.g. the ATS in the US or Chi-X and Turquoise in Europe). The branch of financial economics that deals with these issues is called market microstructure. This course provides an introduction into the theoretical and empirical foundations of market microstructure.

Learning outcomes
This course familiarizes students with the institutional setting of today’s securities markets. They will know how an exchange operates and what the distinguishing features and theoretical foundations of auction and dealer markets are. They will be able to understand and apply measures of market quality and liquidity. They will further understand how asset characteristics, risk aversion and asymmetric information affect the process of price formation and market liquidity.

Necessary prerequisites
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Recommended prerequisites
Module FIN 500; Students should have a sound background in finance. They should be familiar with the different types of securities (stocks, bonds, derivatives), with modern investment analysis and the efficient markets hypothesis. They should also have basic knowledge in statistics and econometrics (unconditional and conditional expected values and variances, regression analysis and hypothesis testing).

Examiner Performing lecturer

Prof. Dr. Erik Theissen Prof. Dr. Erik Theissen