Introduction to FE570: Financial markets and trading

Instructor: Alec Schmidt, alec.schmidt@stevens.edu

Class: Wednesdays, starting at 6:15pm.

Description. The course offers an overview of modern financial markets for various securities, different types of traders, orders, and market structures, market microstructure models used for describing price formation in dealer markets (inventory models and information-based models), models of the limit-order markets, and optimal order execution. The course introduces several typical trading strategies implementing technical analysis, and arbitrage trading strategies, such as pair trading. The course emphasizes implementation and methods of back-testing. Students will learn also the basics of econometrics and R statistical computing language.

Required textbook: [1] A.B. Schmidt, Financial markets and trading: Introduction to market microstructure models and trading strategies (Wiley, 2011).

Recommended textbooks: [2] R.S. Tsay, Analysis of Financial Time Series (Wiley, 2005).[3] P. Teetor, R Cookbook (O’Reilly, 2011).

Grading:Grading consists of five home assignments and a project. In particular, four essays will demonstrate students’ understanding of modern financial markets, and one set of exercises will show students’ handling of time series. Plagiarism and “copy and paste” approach to essays will not be tolerated.

The project will be analysis of performance of a technical trading strategy using the bootstrap resampling technique. Students will implement resampling and back-testing algorithms using programming language of their choice (R is highly preferable). Assignment Grade Percent

Home assignments 50% Project 50%

Total Grade 100%

Topic(s) Reading(s) Home assignment

Week 1 Introduction to the FE570 course

Materials on R programming [3]

Week 2 Financial markets and trading

[1], Chapter 1 HW1

Week 3 Modern financial markets

[1], Chapter 2 HW2

Week 4 Time series analysis [1] Appendixes A and B; [2] HW3 Week 5 Empirical

distributions and prediction of returns

[1], Chapter 7

Week 6 Technical trading strategies

[1], Chapter 10 HW4 (Starting project)

Week 7 Volatility; Analysis of performance of trading strategies

[1], Chapter 8 and 12.1

Week 8 Back-testing of trading strategies

[1], Chapter 12.2-12.3

Week 9 Arbitrage trading strategies

[1], Chapter 11 Project status report

Week 10 Market microstructure models

[1], Chapters 3-4

Week 11 Limit-order markets [1], Chapter 5 HW5 Week 12 Empirical market

microstructure [1], Chapter 6

Week 13 Optimal order execution

[1], Chapter [13]

Week 14 Presentation of projects

Syllabus