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Tom Meltzer

March 10, 2021

The MSFE prepares students for careers in commercial banking, investment banking, asset management, public policy, health care, real estate, technology, and any other sector where finance and economics converge.

At the dawn of commerce, people traded goods for goods or goods for services. A shepherd, for example, might trade one sheep for a portion of a farmer's produce, or may offer to help harvest the farmer's produce in return for a share. This form of barter was inefficient, requiring that each party have something the other wanted and that a fair trade could be negotiated (what if the shepherd only wanted one-fifth of a sheep's worth of produce?). The solution to this problem, of course, was money. Because money has a mutually agreed upon value and can be divided into useful increments, it is adaptable to any transaction. Further, its universal desirability makes it a much more useful currency than a sheep or a rutabaga.

As markets and finance grew more complicated, so too did the types of trades in which people engaged. The advent of different national currencies, for example, gave rise to an industry in foreign exchange, with speculators soon learning that there is money to be made in both currency conversion and currency speculation. These types of transactions—in which money is exchanged for money, rather than goods and services—is the subject of financial economics. In the modern world, financial economics focuses on matters of corporate finance, asset pricing, and stock and foreign exchanges markets.

What is financial economics?

Financial economics is the study of economics with a focus on transactions that are entirely monetary. This distinguishes the field from traditional economics, which, according to Stanford professor emeritus of finance William F. Sharpe, focuses on transactions in which money is exchanged for goods or services.

Sharpe explains that financial economics is distinguished not only by this focus but also by the field's attention to four additional factors:

  • Time: One party is trading money now for an indeterminate monetary return in the future
  • Uncertainty: The transaction involves risk
  • Options: One party has the power to make decisions that could impact the value of subsequent transactions
  • Information: The availability of information may reduce or eliminate the uncertainty associated with the transaction

Financial economists seek to determine the fair value of assets by evaluating all relevant data points, and seek also to anticipate what events might introduce uncertainty that would impact the risk associated with a particular transaction. Like financial engineering and quantitative finance, this is a highly quantitative field involving the aggregation of massive amounts of data, the application of complex mathematics, and the utilization of powerful computers to model markets and predict the likelihood of certain outcomes. Financial economics is typically applied to stock markets and foreign exchange markets, where quantifiable factors such as price fluctuation, inflation, interest rates, and gross domestic product impact the ultimate outcome of transactions.

_(Check this out: What Are the Best Economics Master's Programs?)_

Financial economics rests on two fundamental concepts. The first is portfolio theory, through which degrees of risk and probable return can be computed for different investments. These calculations allow for the creation of different investment portfolios that optimize return for investors with different risk tolerances. The second concept is the capital asset pricing model, which can be used to calculate the appropriate rate of return for an asset based on the risk associated with that asset. The capital asset pricing model offers one method for determining whether a particular investment is worth the risk involved.

What is a master's in financial economics?

A master's degree in financial economics is typically a Master of Science (MSFE or MScFE), although some programs designate the degree a Master of Arts (MAFE). The program is often offered jointly by a university's school of business and its department of economics. Like the master's in financial engineering or the master's in quantitative finance, the master's in financial economics requires a high level of aptitude in advanced mathematics and computer science.

Financial economics combines economic theory and financial theory with quantitative analysis. It straddles the two worlds of traditional business training and more a theory-based quantitative approach, and MSFE curricula often overlap with curricula for other quant disciplines like financial engineering and quantitative finance, but also overlap substantially with MBA curricula, particularly in the area of economics. Required courses typically include microeconomics and macroeconomics, financial modeling, forecasting, options and derivatives, fixed income securities, and risk management. Some core curricula include computer programming courses, others offer them only as electives.

Who are typical candidates for a master's in financial economics?

MSFE students typically hold undergraduate degrees in economics, although engineering, natural science, computer science, and business majors are also well represented. Regardless of one's undergraduate major, a strong background in mathematics and computing is prerequisite to entering this STEM-eligible program. Most programs require applicants to have previously completed courses in intermediate microeconomics, intermediate macroeconomics, economic statistics, linear algebra, intermediate calculus, and computer programming. Financial economics master's programs are typically small, and often include a substantial number of international students, particularly from southeast Asia, India, and China.

What can I do with a master's in financial economics?

Experts in financial economics work in the following roles: financial analyst, equity research analyst, policy analyst, securities analyst, quantitative analyst, capital market associate, asset manager, corporate finance manager, investment banker, commercial banker, financial engineer, staff economist, market forecaster, compliance manager, and private equity/venture capital specialist. The MSFE prepares students for careers in commercial banking, investment banking, asset management, public policy, health care, real estate, technology, and any other sector where finance and economics converge.

Payscale lists the median salary for MSFEs at $62,000, with salaries ranging from $55,861 for a financial analyst to $120,271 for a financial analysis manager. Brandeis, one of the few financial economics programs to list salary data for its graduates, reports an average salary of $68,000 "with salaries ranging up to $100,000 based on industry and experience." It should be noted that many of these programs are very small and have significant populations of international students who return home for jobs, making data on American job placements is relatively scarce.

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