Financial economics

Financial economics is the branch of economics characterised by a “concentration on monetary activities”, in which “money of one type or another is likely to appear on both sides of a trade”.

Its concern is thus the interrelation of financial variables, such as prices, interest rates, and shares, as opposed to those concerning the real economy. It has two main areas of focus: Asset pricing (or investment theory) and corporate finance; the first being the perspective of providers of capital and the second of users of capital.

Over the next few steps, we explore “the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment”. We, therefore, explore decision-making under uncertainty in the context of the financial markets, and the resultant economic and financial models and principles, as well as deriving testable or policy implications from acceptable assumptions. This is built on the foundations of microeconomics and decision theory.

Financial econometrics is the branch of financial economics that uses econometric techniques to parameterise these relationships. Mathematical finance is related in that it will derive and extend the mathematical or numerical models suggested by financial economics. Note though that the emphasis there is mathematical consistency, as opposed to compatibility with economic theory.

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