Economics and Technology of Financial Innovation

GENERAL INFORMATION

  • Stay updated on the business/finance news and check how the markets are doing during the course. (See for exampe Yahoo Finance)
  • Prepare the exam using the slides and the associated material – the slides alone are not enough for a deep understanding of the topics.

Teaching Assistant:
Davi Marim (davi.dealmeidamarim@telecom-paris.fr)

Grading
Problem sets 50%
Exam: 50%

PROBLEM SETS

  • Form groups of 4-3 people to solve the problem sets together.

  • Theory exercises can be handed either in Latex or as pictures of paper documents.
  • Programming and empirical exercises can be done in any language (preferably in Python whenever possible).
  • Business cases can be handed in Word.
  • Groups can manage a private Github to store the solutions to the problem sets.
  • All problem sets are due on Monday April 20th.

PS1

LECTURES

LECTURE 1. The Landscape of Digital Finance
Slides L1

Readings:

  • European Central Bank (2024). Study on the payment attitudes of consumers in the euro area (SPACE). ECB.
  • Bank for International Settlements (2022). Payments and digital money. BIS.
  • European Central Bank (2022). Neobanks: Business models and financial stability implications. ECB.
  • Ahnert, T., Hoffmann, P., & Monnet, C. (2022). The digital economy, privacy, and CBDC. ECB / CEPR seminar paper.
  • Nagel, R. (1995). Unraveling in guessing games: An experimental study. American Economic Review.
  • Frost, J. (2020). The economic forces driving fintech adoption across countries. BIS Working Papers No. 838. Bank for International Settlements.

Sample Balance Sheets

Markets:
https://coinmarketcap.com/
https://polymarket.com/
https://www.justetf.com/

LECTURE 2. Money
Slides L2

Readings:

  • Kiyotaki, N., & Wright, R. (1993). A search-theoretic approach to monetary economics. American Economic Review, 83(1), 63–77.
  • Williamson, S. D., & Wright, R. (2010). New monetarist economics: Methods. Federal Reserve Bank of St. Louis Review.
  • Lagos, R., Rocheteau, G., & Wright, R. (2017). Liquidity: A new monetarist perspective. Journal of Economic Literature.
  • Lagos, R., & Wright, R. (2005). A unified framework for monetary theory and policy analysis. Journal of Political Economy.
  • Kocherlakota, N. R. (1998). Money is memory. Journal of Economic Theory.
  • Fernández-Villaverde, J. (2018). Cryptocurrencies: A crash course. University of Pennsylvania, lecture notes / working paper.
  • McLeay, M., Radia, A., & Thomas, R. (2014). Money creation in the modern economy. Bank of England Quarterly Bulletin, Q1.

Handouts:
Poisson Process in Search Theory
Kiyotaki-Wright Model

LECTURE 3. Blockchain: Cryptography and Nakamoto Consensus
Slides L3

DIARY:


Day 1

The digitalization of finance:
– shifts in payment methods, market volumes, business models
– new actors in the financial economy (bigtech, fintech, wealthtech)
– financial innovation and financial inclusion
– business model and balance sheet  
– attention markets: meme stocks, meme coins
– information markets: polymarket

Asset values and coordination games:
– the Keynesian Beauty Contest game (experiment guess 2/3 of average)
– Nash Equilibrium of the Keynesian Beauty Contest

Basic economic notions:
– equity, debt, stock, bond, asset, liability
– long position, short position, strike price, spot price
– inflation, nominal value, real value
– discount factor, discount rate

Money:
– historical examples of monies
– money as unit of account, medium of exchange, and store of value

Money as a Network Good:
– first encounter with the Kiyotaki Wright model
– conditions for sustaining money exchanges
– coordination failure and multiplicity of equilibria

Day 2

– Recap on definition of money

– Kiyotaki Wright (KW) model basics (2 periods)

– WK with single coincidence meetings in discrete time:
— model definition: agents, payoffs, states, distributions, value functions
— From discrete time to continuous time
— Equilibria of the KW model (non-monetary, monetary, and mix)
— Welfare calculation in the KW model

– Poisson process in continuous-time search and matching models
— Poisson distribution
— Exponential random variable
— Minima of exponential RVs
— Probability of state arrivals
— Derivation of the Bellman equation (Value function in recursive form)

– KW with double coincidence meetings and barater
— model definition,
— equilibrium,
— welfare

– KW with idle producer state (V0, Vg, Vm)
— value function
— steady state balance equation
— equilibrium system