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Financial Economics is a branch of economics that concentrates on valuation in monetary terms. It incorporates economic theories in the evaluation of how time, risks, opportunity costs and information can create incentives. It is responsible for driving policy consequences from stipulated assumptions. Financial econometrics involves formulation of models that are used to test the variables affecting a particular decision. The created models take into assumption the rationality in terms of action of the parties involved in making the decisions. With respect to this assumption, it is taken to account that irrational behavior of parties is considered to be a risk factor.
Financial economics is a subject closely related to behavioral economics, gambler fallacy econometrics, behavioral finance and rational behavior. Financial economics emphasizes its concerns on correlations between financial variables such as prices, interest rates, and shares. General equilibrium in financial economics deals with the behavior of supply, demand and prices in the economy with markets interlinked to form a relationship.
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