Financial economics

Financial economics is the study of the valuation of securities, risk and returns, the financing of companies and the making of investment decisions. Where sophisticated mathematics is used, it is called quantitative finance.

It is a branch of economics and uses many of the same concepts and tools. Like the rest of economics, modern financial economics is a very quantitative discipline and makes extensive use of econometrics as well as a range of other mathematical methods.

Important subject areas within financial economics include the valuation of securities and corporate finance (the financing and behaviour of companies).

Particularly important results and models include:

• CAPM
• arbitrage pricing theory
• the Black-Scholes formula
• capital structure irrelevance
• dividend irrelevance.

Key concepts include:

• the time value of money
• arbitrage, the law of one price, and dominant trading strategies
• risk premiums.

Areas of overlap with other branches of economics and with other disciplines include:

• econometrics
• agency theory
• behavioural finance.

Econometrics is one of the most important of the areas of overlap with other disciplines. It is central to the application and testing of financial economics. Agency theory is an important part of corporate finance while behavioural finance is a newer and somewhat peripheral, but interesting, field.