AØKA08212U  Financial Markets

Volume 2013/2014
MSc in Economics

This course examines the financial markets from a Micro perspective. When traders operate in the financial market, how do they arrive at the transactions prices? How is the traders’ dispersed information incorporated into these prices? What determines the liquidity and depth of an asset market? What is the optimal behaviour for traders in financial markets? Why do bubbles and crashes arise? Do the institutional details of the exchange influence this price formation process? If so, how should exchanges and regulators ideally design the rules of trading? Is there a role for market making, should the market be fully transparent, should insider trading be permitted, should transactions be taxed, and is high-frequent trading good or bad for the market?

Financial economics addresses these and related questions in the field of financial markets’ microstructure. This course seeks to give a broad introduction to the field through a textbook covering theory, evidence and policy. It also provides deeper insight on topics of current interest on the basis of selected current research papers. The lectures will often draw on recent media clippings of relevance for the topic.

Learning Outcome
A strong analytical framework now provides a good understanding of Financial Market issues. Nevertheless, research in this area still leaves many questions open for further investigations. This course partly gives participants a review the facts on financial markets, partly presents the key theoretical models, and partly addresses how the models are applied to the important issues.

The final exam tests the students' specific and general knowledge of the aforementioned aspects of Financial Market theory, emphasizing three abilities:

  1. The ability to readily explain and discuss key theoretical concepts and results from academic articles, as well as their interpretation,
  2. The ability to carefully derive and analyze results within an advanced, mathematically specified theoretical model,
  3. The ability to apply the most relevant theoretical apparatus to analyze a given, new case-based problem.
In order to achieve the maximal grade for the course, the student must excel in all three areas.
Thierry Foucault, Marco Pagano and Ailsa Röell: “Market Liquidity: Theory Evidence and Policy,” Oxford University Press, 2013. 439 pages.
Dominique Dupont and Gabriel Lee: “Effects of securities transaction taxes on depth and bid-ask spread,” Economic Theory (2007) 31: 393–400.

Boyan Jovanovic and Albert Menkveld: “Middlemen in Limit-Order Markets,” NYU and Amsterdam mimeo, 2012. 58 pages.

Andrei Kirilenko, Albert Kyle, Mehrdad Samadi and Tugkan Tuzun: “The Flash Crash: The Impact of High Frequency Trading on an Electronic Market,” CFTC and Maryland mimeo, 2011. 64 pages.


The course builds mainly on basic Finance, such as may be acquired in the third year course on Corporate Finance and Incentives. We also employ the modelling skills from the bachelor’s courses in Micro.
Mostly lectures covering the syllabus with a view towards accomplishing the course goals. Supplemented by problem sets.
7,5 ECTS
Type of assessment
Written assignment, 48 hours
An individual 48 hours take-home assignment.
All aids allowed
Marking scale
7-point grading scale
Censorship form
External censorship
100 % censurship
Exam period
Will be updated before the start of the semester
Same as ordinary. But if only a few students have registered for the re-exam, the exam might change to an oral exams with a synopsis to be handed in. This means that the examination date also will change.
Criteria for exam assesment
The Student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course.
  • Category
  • Hours
  • Lectures
  • 42
  • Preparation
  • 116
  • Exam
  • 48
  • Total
  • 206