You might have wondered before, how does the stock market go up or down or perhaps, how prices are determined in financial markets or if you've ever come across such terms as "commodities" or "mutual funds,” etc. then, you might want to consider taking a look into what financial economics is and how it does works.
What is Financial Economics:
Financial economics is a branch of economics that deals with various financial markets, considering the distribution of various resources under the risk of uncertainty in financial markets. It particularly concentrates on monetary activities of financial markets, thus making it a quantitative field.
How Financial Economics Works:
Financial economics applies various techniques of economic analysis to understand the savings and investment decisions of individuals, finance decisions of firms, and the economic role of various financial intermediaries.
In the terms of cash flow, financial economics helps to determine how an asset or an event influences the generation of cash flow.
For example, the U.S. economy has faced severe strains in the past few months with the current situation of the presidential election. The uncertainty over the US elections results are drawing many investors to the greenback to hedge their positions. Thus, showing us how important Financial economics is in making investment decisions, identifying risks, and valuing securities and assets, whether as an individual or the market.
Benefits of Financial Economics:
✓ Financial intermediaries help to improve investment efficiency, which leads to higher economic growth.
✓ Financial economics helps you understand many important financial decisions that you will have to make throughout your path, for example, buying a home, saving for college, dealing with depth and so on.
The relation of finance with economics is quite important, as it shows how an economy’s finances are behaving.
Written by Arya Pratishi