Imperial College MSc Finance Autumn Term

Time is running fast! We are already halfway through the spring term of the MSc Finance programme at Imperial College Business School (ICBS) and I haven’t even reported on last term’s lectures yet. But as promised in October, here are my thoughts on the autumn term’s four core courses.

For me personally, Corporate Finance was the least interesting course, so let’s get it out of the way first. Basically, the lectures were closely based on the Corporate Finance textbook by Jonathan Berk and Peter DeMarzo. This had the advantage that the lectures were clearly structured and it was easy to find reading material going beyond the lecture slides. Unfortunately, in the first few lectures there was a bit of an overlap with the Business Valuation course we had had in September. But to be fair, this was the first time the Corporate Finance lecturer taught the course at Imperial and he later told us that he was going to compress some of the introductory stuff for next year’s class in order to be able to spend more time on the more interesting topics. Roughly speaking, the course was divided into the aforementioned introductory part about the fundamentals of valuation for all-equity firms, and a part about valuation methods taking a firm’s capital structure into account. This second part, stretched out over five lectures, started off with an idealized Modigliani and Miller setting. Each subsequent lecture new complications, such as debt, taxes, leverage and financial distress, were then added to make the valuation models more realistic. The course was concluded by a lecture on mergers and takeovers. Even though I said that I did not find it very interesting myself, I don’t want to sound negative, because the course was all right overall. It could have used some examples containing actual company data or a more elaborate case study instead of exclusively relying on exercises from the book, in my opinion. But the course has been an especially useful introduction for those students going to work in mergers and acquisitions, equity research or related fields, and many of them have since chosen to continue with the Applied Corporate Finance and Advanced Corporate Finance electives, which are offered in the spring and in the summer.

Financial Econometrics is a course I found extremely relevant, considering the importance of econometric methods for empirical research. Especially in finance, however, econometrics is not merely used in academia but also in practice. Many quantitative trading strategies or risk management tools, for instance, are based on results obtained from empirical studies. Unfortunately, the course covered a myriad of topics. On one hand, you could argue that this gives you a complete overview of the basic econometric techniques and I can see why this might be important to the majority of students, most of whom are going to join investment banks upon graduation. On the other hand, however, one must acknowledge that we did not go into a lot of detail in most of the lectures, which I found slightly disappointing. I would have preferred if we had covered only a selection of the topics and looked at them more thoroughly instead. Still, I stand by my point that the course has been useful. It made me aware of many pitfalls to avoid in hypothesis testing and introduced important time series properties that you should test for before drawing any statistical inferences. Also, this was only the first of our econometrics courses: In the spring term, we currently have Advanced Financial Econometrics, which, as the name suggests, is more technical and builds on our knowledge from the previous term’s lectures. Taken together, the two courses introduce a lot of material and they train students rather well in the use of econometrics. In addition to academic papers, the autumn lectures were mostly based on the textbook Introductory Econometrics for Finance by Chris Brooks. It is not very technical, which makes it easy enough to read. I found the book handy as a quick reference during my revisions for the final exam, but overall the lecture slides and the notes from the tutorial classes were already quite self-contained.

Another quantitative subject we covered during the autumn term was that of Mathematical Finance. The course presented an introduction into the pricing of assets in complete and incomplete markets. Almost everything that was covered in Mathematical Finance was new to me, so I got a lot out of the course. The course textbook was Mathematical Techniques in Finance by Ales Cerny. Following the outline from this truly excellent book, which I am certain to flip open again for future reference, the lecturer first introduced a one-period finite state model for the pricing of derivatives as well as the concept of Arrow-Debreu securities. He went on to lecture about state prices, the ubiquitous no-arbitrage pricing theorem and the utilization of risk-neutral probabilities in asset pricing. We eventually stepped from pricing securities in discrete time into the nebulous world of continuous time and stochastic processes, learning about Martingales, Brownian Motion and the Itô formula, to name the most important concepts. Although some of this was difficult to understand during the lectures, the book helped a lot and the course topics have proven useful in our follow-up lectures in the spring term. For instance, we regularly use the concepts from Mathematical Finance in our Asset Pricing and Derivatives course.

At least as insightful was the fourth course, Investments and Portfolio Management. The first lecture began with optimal portfolio selection in the mean-variance space and the capital asset pricing model (CAPM). While I knew this from my previous studies already, a lot of this was new to many students who had previously studied something unrelated, such as engineering or mathematics. We moved on to the APT, multi-factor models and the CCAPM, then discussed the efficiency of markets and behavioural biases and ultimately looked at the predictability of asset returns, which I found to be the most interesting part of the course. The lecturer, one of my favourites at Imperial so far, mostly explained things in detail, provided both practical examples and cited results from the academic literature. But he also moved fast, making IPM a very demanding course. The recommended textbook for the course was Investments by Bodie, Kane and Marcus, but as mentioned already, the lectures relied a lot on academic papers. The textbook was a good complement for the lecture notes, though. In addition, Asset Pricing by Cochrane proved to be an invaluable reference for what we covered on return predictability (some chapters were required readings).

All in all, we studied what feels like a thousand things during the autumn term. Time was always a scarce resource, especially since we were required to regularly submit either individual or group coursework, sometimes up to three assessed pieces of work in a week. The amount of time the coursework takes away from your study schedule is not to be underestimated. What made the autumn term even more demanding for many students is that September-December is the time of the year when the big firms in the finance industry are accepting applications for internships and graduate schemes. The majority of MSc Finance students applied for jobs during those months and thus had multiple job interviews and assessment centres throughout the term.

As I write this, the spring term is already well under way. I will most likely report back on the spring term’s lectures in April. Before then, I’ll have exams to prepare for — they’re not as far away as one might wish. (Four weeks can go by in an instant!)

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