Master of Financial Economics
Encyclopedia
A master’s degree in financial economics
provides an understanding of theoretical
finance
and the underlying economic
framework. The degree is postgraduate, and may incorporate a thesis
or research component. Programs are often a joint offering by the business school
and the economics
department; see List of master's degrees in financial economics. Closely related degrees include the "Master of Finance and Economics" and the "Master of Economics
with a specialization in Finance / Financial Economics".
The nature of the degree differs by university. Often, the degree is largely theoretical, and prepares graduates for research
positions, for doctoral study in economics
, or for roles in applied economics
. Several are positioned as professional degrees, preparing graduates for career
s in banking and finance, and are comparable to the Master of Science in Finance, though with an increased weighting towards theory. In some cases, programs are substantially quantitative and are largely akin to a Master of Quantitative Finance
.
component. The programs require a bachelor's degree
prior to admission, but do not (usually) require an undergraduate major
in finance or economics; a usual requirement is exposure to calculus
, statistics
and probability
, and sometimes linear algebra
and differential equations. Many programs include a review of these topics as an initial bridging / refresher course.
The curriculum
is distributed between theory, applications and modelling, with the emphasis on each differing by university, as above.
and mathematical finance
- see Master of Quantitative Finance
(MQF). These degrees aim to train practitioners and "quants"
- i.e. specialists in derivatives
, fixed income
and risk analysis
- as opposed to economist
s, and their curricula are therefore weighted toward stochastic calculus
, numerical methods
, simulation techniques
and programming, and are quantitative (well) beyond the level of the Financial Economics degree. At the same time, their coverage of financial theory, and of econometrics, while also significant, is (often) secondary Entrance requirements are similarly more mathematical. As mentioned, some Financial Economics degrees are substantially quantitative and differ very little from the MQF.
The overlap with general finance degrees such as the Master of Science in Finance (M.S.F.), or with an M.B.A. in finance, is further limited, particularly where the Financial Economics program is theory oriented. These degrees are focused on financial management
, corporate finance
and investment management
, and are practice oriented with limited exposure to the underlying economic theory. Note though, that since these courses train graduates in the use of the models developed in Financial Economics, the theory is (sometimes) covered in the context of (a high level) understanding of model assumptions. Similar comments apply to professional certifications such as the Chartered Financial Analyst
(CFA) designation. Note also, that the Master of Finance
(M.Fin.) degree, as opposed to the MSF, has a significant theory component (as well as quantitative component), and is largely identical to the Master's in Financial Economics.
Financial economics
Financial Economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment"....
provides an understanding of theoretical
Theory
The English word theory was derived from a technical term in Ancient Greek philosophy. The word theoria, , meant "a looking at, viewing, beholding", and referring to contemplation or speculation, as opposed to action...
finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
and the underlying economic
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
framework. The degree is postgraduate, and may incorporate a thesis
Thesis
A dissertation or thesis is a document submitted in support of candidature for an academic degree or professional qualification presenting the author's research and findings...
or research component. Programs are often a joint offering by the business school
Business school
A business school is a university-level institution that confers degrees in Business Administration. It teaches topics such as accounting, administration, economics, entrepreneurship, finance, information systems, marketing, organizational behavior, public relations, strategy, human resource...
and the economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
department; see List of master's degrees in financial economics. Closely related degrees include the "Master of Finance and Economics" and the "Master of Economics
Master of Economics
A Master's Degree in Economics is a postgraduate academic program, offering training in economic theory, econometrics and / or applied economics. The degree may be offered as a terminal degree or as additional preparation for doctoral study, and is sometimes offered as a professional degree...
with a specialization in Finance / Financial Economics".
The nature of the degree differs by university. Often, the degree is largely theoretical, and prepares graduates for research
Research
Research can be defined as the scientific search for knowledge, or as any systematic investigation, to establish novel facts, solve new or existing problems, prove new ideas, or develop new theories, usually using a scientific method...
positions, for doctoral study in economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, or for roles in applied economics
Applied economics
Applied economics is a term that refers to the application of economic theory and analysis. While not a field of economics, it is typically characterized by the application of economic theory and econometrics to address practical issues in a range of fields including labour economics, industrial...
. Several are positioned as professional degrees, preparing graduates for career
Career
Career is defined by the Oxford English Dictionary as a person's "course or progress through life ". It is usually considered to pertain to remunerative work ....
s in banking and finance, and are comparable to the Master of Science in Finance, though with an increased weighting towards theory. In some cases, programs are substantially quantitative and are largely akin to a Master of Quantitative Finance
Master of Quantitative Finance
A masters degree in quantitative finance concerns the application of mathematical methods to the solution of problems in financial economics. There are several like-titled degrees which may further focus on financial engineering, financial risk management, computational finance and/or mathematical...
.
Structure
Masters in Financial Economics are usually one to one and a half years in duration, and often include a thesisThesis
A dissertation or thesis is a document submitted in support of candidature for an academic degree or professional qualification presenting the author's research and findings...
component. The programs require a bachelor's degree
Bachelor's degree
A bachelor's degree is usually an academic degree awarded for an undergraduate course or major that generally lasts for three or four years, but can range anywhere from two to six years depending on the region of the world...
prior to admission, but do not (usually) require an undergraduate major
Academic major
In the United States and Canada, an academic major or major concentration is the academic discipline to which an undergraduate student formally commits....
in finance or economics; a usual requirement is exposure to calculus
Calculus
Calculus is a branch of mathematics focused on limits, functions, derivatives, integrals, and infinite series. This subject constitutes a major part of modern mathematics education. It has two major branches, differential calculus and integral calculus, which are related by the fundamental theorem...
, statistics
Statistics
Statistics is the study of the collection, organization, analysis, and interpretation of data. It deals with all aspects of this, including the planning of data collection in terms of the design of surveys and experiments....
and probability
Probability
Probability is ordinarily used to describe an attitude of mind towards some proposition of whose truth we arenot certain. The proposition of interest is usually of the form "Will a specific event occur?" The attitude of mind is of the form "How certain are we that the event will occur?" The...
, and sometimes linear algebra
Linear algebra
Linear algebra is a branch of mathematics that studies vector spaces, also called linear spaces, along with linear functions that input one vector and output another. Such functions are called linear maps and can be represented by matrices if a basis is given. Thus matrix theory is often...
and differential equations. Many programs include a review of these topics as an initial bridging / refresher course.
The curriculum
Curriculum
See also Syllabus.In formal education, a curriculum is the set of courses, and their content, offered at a school or university. As an idea, curriculum stems from the Latin word for race course, referring to the course of deeds and experiences through which children grow to become mature adults...
is distributed between theory, applications and modelling, with the emphasis on each differing by university, as above.
- The theory component centres on decision makingDecision makingDecision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
under uncertaintyUncertaintyUncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...
in the context of the financial markets, and the resultant economic and financial models. The degree essentially explores how rational investorsHomo economicusHomo economicus, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends...
would apply decision theoryDecision theoryDecision theory in economics, psychology, philosophy, mathematics, and statistics is concerned with identifying the values, uncertainties and other issues relevant in a given decision, its rationality, and the resulting optimal decision...
to the problem of investmentInvestmentInvestment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
. Investment under "certaintyCertaintyCertainty can be defined as either:# perfect knowledge that has total security from error, or# the mental state of being without doubtObjectively defined, certainty is total continuity and validity of all foundational inquiry, to the highest degree of precision. Something is certain only if no...
" is initially considered (Fisher separation theoremFisher separation theoremIn economics, the Fisher separation theorem asserts that the objective of a corporation will be the maximization of its present value, regardless of the preferences of its shareholders. The theorem therefore separates management's "productive opportunities" from the entrepreneur's "market...
, "theory of investment value", Modigliani-Miller theoremModigliani-Miller theoremThe Modigliani–Miller theorem forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process , in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is...
). "Choice under uncertainty" is then introduced, and the twin assumptions of rationalityRational pricingRational pricing is the assumption in financial economics that asset prices will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away"...
and market efficiency lead to modern portfolio theoryModern portfolio theoryModern portfolio theory is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets...
(the CAPMCapital asset pricing modelIn finance, the capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk...
), and to the Black Scholes theory for option valuationValuation of optionsIn finance, a price is paid or received for purchasing or selling options. This price can be split into two components.These are:* Intrinsic Value* Time Value-Intrinsic Value:...
. Where the program emphasizes economics, the curriculum is extended: it explores phenomena where these assumptions do not hold (noise tradingNoise traderA noise trader also known informally as idiot trader is described in the literature of financial research as a stock trader whose decisions to buy, sell, or hold are irrational and erratic...
, market microstructureMarket microstructureMarket microstructure is a branch of finance concerned with the details of how exchange occurs in markets. While the theory of market microstructure applies to the exchange of real or financial assets, more evidence is available on the microstructure of financial markets due to the availability of...
, behavioural finance) and it discusses models which are further generalised (Fundamental theorem of arbitrage-free pricingFundamental theorem of arbitrage-free pricingThe fundamental theorems of arbitrage/finance provide necessary and sufficient conditions for a market to be arbitrage free and for a market to be complete. An arbitrage opportunity is a way of making money with no initial investment without any possibility of loss...
, arbitrage pricing theoryArbitrage pricing theoryIn finance, arbitrage pricing theory is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a...
) or extended (Multi-factor modelsFama-French three-factor modelIn asset pricing and portfolio management the Fama-French three factor model is a model designed by Eugene Fama and Kenneth French to describe stock returns....
, models of the short rateShort rate modelIn the context of interest rate derivatives, a short-rate model is a mathematical model that describes the future evolution of interest rates by describing the future evolution of the short rate, usually written r_t \,.-The short rate:...
, Intertemporal CAPMIntertemporal CAPMThe Intertemporal Capital Asset Pricing Model, or ICAPM, was an alternative to the CAPM provided by Robert Merton. It is a linear factor model with wealth and state variable that forecast changes in the distribution of future returns or income....
, Black–Litterman model). Coursework here is often titled "Asset pricing" and "Corporate finance theory".
- Application of the economic principles includes valuationValuation-Economics:*Valuation , the determination of the economic value of an asset or liability**Real estate appraisal, sometimes called property valuation , the appraisal of land or buildings...
and asset allocationAsset allocationAsset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investors risk tolerance, goals and investment time frame.-Description:...
, and covers specific financial instruments - such as fixed incomeFixed incomeFixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....
, equities, derivativesDerivative (finance)A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
, foreign exchangeForeign exchange marketThe foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
- and their portfoliosPortfolio (finance)Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
. The aim here is twofold: firstly, to complement the theory; secondly, providing graduates with practical market knowledge. In the economics-focused degrees, this coverage is often of secondary importance, while in the professional degrees it is a major component, and often includes separate course work in (practical) corporate financeCorporate financeCorporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
, portfolio managementInvestment managementInvestment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
and financial risk managementFinancial risk managementFinancial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc...
. MacroeconomicsMacroeconomicsMacroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
is also usually included; often though, as opposed to covering macroeconomic theory in general, the topics are applied and / or finance related with a focus on modelling and forecastingEconomic forecastingEconomic forecasting is the process of making predictions about the economy. Forecasts can be carried out at a high level of aggregation - for example for GDP, inflation, unemployment or the fiscal deficit - or at a more disaggregated level, for specific sectors of the economy or even specific...
the relationships between asset classes and their expectedExpectationIn the case of uncertainty, expectation is what is considered the most likely to happen. An expectation, which is a belief that is centered on the future, may or may not be realistic. A less advantageous result gives rise to the emotion of disappointment. If something happens that is not at all...
returns.
- The modelling curriculum complementComplementIn many different fields, the complement of X is something that together with X makes a complete whole—something that supplies what X lacks.Complement may refer to:...
s both of the above. The theory is augmented via the study of econometricsEconometricsEconometrics has been defined as "the application of mathematics and statistical methods to economic data" and described as the branch of economics "that aims to give empirical content to economic relations." More precisely, it is "the quantitative analysis of actual economic phenomena based on...
, financial time seriesTime seriesIn statistics, signal processing, econometrics and mathematical finance, a time series is a sequence of data points, measured typically at successive times spaced at uniform time intervals. Examples of time series are the daily closing value of the Dow Jones index or the annual flow volume of the...
and statistical modelStatistical modelA statistical model is a formalization of relationships between variables in the form of mathematical equations. A statistical model describes how one or more random variables are related to one or more random variables. The model is statistical as the variables are not deterministically but...
ling, with a focus on the empiricalEmpiricalThe word empirical denotes information gained by means of observation or experimentation. Empirical data are data produced by an experiment or observation....
and statistical testing of economic theory, and on developing and documenting new econometric models. Students are taught to model using statistical packages such as SAS. The applications are reinforced through the computer based implemention of the more complex problems (often including numeric methods for option pricing, Value at riskValue at riskIn financial mathematics and financial risk management, Value at Risk is a widely used risk measure of the risk of loss on a specific portfolio of financial assets...
, constructing efficient portfoliosEfficient FrontierThe efficient frontier is a concept in Modern portfolio theory introduced by Harry Markowitz and others. A combination of assets, i.e. a portfolio, is referred to as "efficient" if it has the best possible expected level of return for its level of risk...
and yield curve modeling). Here, though, the focus is typically on the concept as opposed to the modellingMathematical modelA mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used not only in the natural sciences and engineering disciplines A mathematical model is a...
, per se, and is therefore (often) limited to the spreadsheetSpreadsheetA spreadsheet is a computer application that simulates a paper accounting worksheet. It displays multiple cells usually in a two-dimensional matrix or grid consisting of rows and columns. Each cell contains alphanumeric text, numeric values or formulas...
environment: Computational financeComputational financeComputational finance, also called financial engineering, is a cross-disciplinary field which relies on computational intelligence, mathematical finance, numerical methods and computer simulations to make trading, hedging and investment decisions, as well as facilitating the risk management of...
is the domain of specialized degrees, although some Financial Economics programs do emphasize mathematical modelling and programming - see further below.
Comparison with other qualifications
There is some overlap with programs in financial engineering, computational financeComputational finance
Computational finance, also called financial engineering, is a cross-disciplinary field which relies on computational intelligence, mathematical finance, numerical methods and computer simulations to make trading, hedging and investment decisions, as well as facilitating the risk management of...
and mathematical finance
Mathematical finance
Mathematical finance is a field of applied mathematics, concerned with financial markets. The subject has a close relationship with the discipline of financial economics, which is concerned with much of the underlying theory. Generally, mathematical finance will derive and extend the mathematical...
- see Master of Quantitative Finance
Master of Quantitative Finance
A masters degree in quantitative finance concerns the application of mathematical methods to the solution of problems in financial economics. There are several like-titled degrees which may further focus on financial engineering, financial risk management, computational finance and/or mathematical...
(MQF). These degrees aim to train practitioners and "quants"
Quantitative analyst
A quantitative analyst is a person who works in finance using numerical or quantitative techniques. Similar work is done in most other modern industries, but the work is not always called quantitative analysis...
- i.e. specialists in derivatives
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
, fixed income
Fixed income
Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....
and risk analysis
Risk analysis (Business)
Risk analysis is a technique to identify and assess factors that may jeopardize the success of a project or achieving a goal.This technique also helps to define preventive measures to reduce the probability of these factors from occurring and identify countermeasures to successfully deal with these...
- as opposed to economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
s, and their curricula are therefore weighted toward stochastic calculus
Stochastic calculus
Stochastic calculus is a branch of mathematics that operates on stochastic processes. It allows a consistent theory of integration to be defined for integrals of stochastic processes with respect to stochastic processes...
, numerical methods
Numerical analysis
Numerical analysis is the study of algorithms that use numerical approximation for the problems of mathematical analysis ....
, simulation techniques
Monte Carlo methods in finance
Monte Carlo methods are used in finance and mathematical finance to value and analyze instruments, portfolios and investments by simulating the various sources of uncertainty affecting their value, and then determining their average value over the range of resultant outcomes. This is usually done...
and programming, and are quantitative (well) beyond the level of the Financial Economics degree. At the same time, their coverage of financial theory, and of econometrics, while also significant, is (often) secondary Entrance requirements are similarly more mathematical. As mentioned, some Financial Economics degrees are substantially quantitative and differ very little from the MQF.
The overlap with general finance degrees such as the Master of Science in Finance (M.S.F.), or with an M.B.A. in finance, is further limited, particularly where the Financial Economics program is theory oriented. These degrees are focused on financial management
Managerial finance
Managerial finance is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique....
, corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
and investment management
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
, and are practice oriented with limited exposure to the underlying economic theory. Note though, that since these courses train graduates in the use of the models developed in Financial Economics, the theory is (sometimes) covered in the context of (a high level) understanding of model assumptions. Similar comments apply to professional certifications such as the Chartered Financial Analyst
Chartered Financial Analyst
The Chartered Financial Analyst Program is a graduate level self-study program offered by the CFA Institute to investment and financial professionals...
(CFA) designation. Note also, that the Master of Finance
Master of Finance
A Master of Finance is a Master's degree designed to prepare graduates for careers in financial analysis, investment management and corporate finance. An alternate degree title is Master in Finance or Master of Science in Finance...
(M.Fin.) degree, as opposed to the MSF, has a significant theory component (as well as quantitative component), and is largely identical to the Master's in Financial Economics.
See also
- List of master's degrees in financial economics
- Master of FinanceMaster of FinanceA Master of Finance is a Master's degree designed to prepare graduates for careers in financial analysis, investment management and corporate finance. An alternate degree title is Master in Finance or Master of Science in Finance...
- Master of EconomicsMaster of EconomicsA Master's Degree in Economics is a postgraduate academic program, offering training in economic theory, econometrics and / or applied economics. The degree may be offered as a terminal degree or as additional preparation for doctoral study, and is sometimes offered as a professional degree...
- Master of Quantitative FinanceMaster of Quantitative FinanceA masters degree in quantitative finance concerns the application of mathematical methods to the solution of problems in financial economics. There are several like-titled degrees which may further focus on financial engineering, financial risk management, computational finance and/or mathematical...
- :Category:Professional certification in finance
External links
- Postgraduate finance degrees & Specialised courses in economics, courses-careers.com
- Getting an MBA vs. a Master's in Finance or Economics, mbapodcaster.com
- Careers in Financial Economics, claremontmckenna.edu
- Career opportunities in financial economics, stkate.edu