Bài giảng Financial Markets - Lecture 1: Introductory Lecture

Financial MarketsEconomics 252Robert ShillerIntroductory LectureFinancial and Insurance as Powerful Forces in Our Economy and SocietyThis course seeks to understand the full role of advanced risk management in our economy and societyFinance, insurance, some public financeThe Fundamental Role of Risk ManagementAll manner of enterprise involves riskDifficulties in quantifyingJudgment Financial theory provides an understanding of these risksFinancial institutions provide a framework for applying theoryMoral HazardExample: burning down a house to collect on fire insuranceUbiquity of moral hazard problemsPractical finance has developed institutions to promote risk management while dealing with moral hazardMajor Financial SectorsSecuritiesBanksInsuranceSocial InsuranceAll of these have a long history of promoting risk management and dealing with moral hazard. They are fundamental elements of our successful modern economyRadical Financial InnovationRisks not easily conceptualizedPublic resistance to risk managementEach major risk category requires difficult institutional innovations to manageDemocratization of FinanceTrend over the centuries has been to apply financial and insurance principles to a broader and broader segment of populationAdvance of information technologyFinance and PsychologyThe Behavioral Finance RevolutionNBER-Sage Seminars on Behavioral Finance, with Richard Thaler, starting 1991 Revolution in the finance profession. But not everyone has been captured by it.Finance and ManagementMost central discipline for managers is financeIntegration into all aspects of business management, including accounting, corporate strategy, industrial organizationIntegration into government finance as wellIntegration growing through timeFinance and LawLawyers are often financial inventorsOften government role in processLaw schools deal with all the minutiaeText #1: Foundations of Financial Markets and InstitutionsFrank J. Fabozzi, Author/Editor of 117 books, publisher (Frank Fabozzi Associates), Adjunct Prof. Yale SOMFranco Modigliani, Prof. Of Economics and Finance Emeritus, MITFrank J. Jones, Guardian Life Insurance Co. of AmericaMichael G. Ferri. George Mason UniversityEntire book assignedText #2 Stocks for the Long RunJeremy Siegel, 1994, 1998, 2002Book is best known for making the case for stocks as best long-term investmentBut in fact offers a wide view of empirical literature on financial marketsText #3 New Financial OrderRobert Shiller 2003Extrapolates trends from the past into the financial futureLast 20 years saw massive financial innovationNext 20 years will see even more financial innovationFinancial theory offers a conceptual framework for a broad advance in the depth of risk managementPacket of Readings for Econ252Audubon Copy Whitney Ave. Near Clark’sRequired purchaseLecture 2: The Universal Principle of Risk Management: Pooling and Hedging of RiskOrigins of concept of probabilityMultiplication rule, law of large numbers is basis of risk managementExamples of risk pooling in operationReview of basic statistical and associated economic concepts: Expected utility theory, variance, covariance regression analysisLecture 3: Technology and Invention in FinanceFinancial institutions are inventions as much as engines areOnce discovered, inventions copied around the worldRelation to new information technologyEvolving role of patent lawLecture 4: Insurance: The Archetypal Risk Management InstitutionPrivate insurance institutions were invented after fire of London 1666Role of discovery of probability theory in this inventionThe extension through time of insurance practice into increasingly more realms of human riskModern insurance companies and their regulatorsLecture 5: Portfolio Diversification and Supporting Financial InstitutionsHow risks are spreadCovariance with market portfolioBetaMutual fund theoremInvestment companies and their managementLecture 6: Efficient Markets and Excess Volatility Efficient Markets Hypothesis vs. Random walkApparent inability of professionals to make moneyWarren Buffet and David Swensen: What does their experience prove?Lecture 7: Behavioral Finance: The Role of PsychologyResearch in psychologyAnomalies in financeKahneman & Tversky: Prospect TheoryLecture 8: Human Foibles, Manipulation and RegulationLouis Brandeis and insiders vs. outsidersSecurities and Exchange Commission, 1934The battle against fraudRegulation around the worldLecture 9: Debt Markets, Term Structure of Interest RatesLecture 10: Corporate Equity: Earnings & DividendsIssues in dividend payoutModigliani-Miller theoremHistorical changes in dividend-price ratios Financial innovation blurring the role of dividendsLecture 11: Corporate Equity, Debt & TaxesIssues firms face in decided how much to borrowModigliani Miller irrelevance theoremHistorical changes in leverageBehavioral finance response to extreme version of Modigliani MillerLecture 12: Real Estate Finance Today and in the FutureRisk management as practiced today in real estateEfficiency of markets for houses, commercial real estateReal Estate Investment Trusts and existing other institutionsNew institutions: Home equity insurance, housing partnerships, SAMs, Macro securitiesLecture 13: Banking in a Changing WorldMultiple expansion of creditMoney multiplierMajor banks of world, size distributionImportance of banks in less developed countriesBank regulation, Basel AccordImpact of information technology on bankingLecture 14: The Evolution and Perfection of Monetary PolicyBoard of Governors of Federal Reserve System has been model for world Central BanksIndependent central bank and FOMC procedures adopted around the worldMonetary Policy RulesEffects of monetary policy on financial marketsLecture 15: Investment Banking and Secondary MarketsThe role of underwriters Directly placed offeringsRegulation of investment banksRole of investment banks in financial innovationLecture 16: The Changing Role of Institutional InvestingObjectives and risks facing institutional investorsLimits to arbitrageRegulation and other forces operating on institutional investorsImpacts on institutional investing of a changing financial worldLecture 17: Brokerage, ECNsThe traditional exchanges: New York Stock Exchange, Amex, regional exchangesNasdaq and electronic exchangesThe stock brokerage businessStock price indexesSpiders and other exchange-traded instrumentsLecture 18: Consumer FinanceCredit cards, home equity loans, etc.Laws to protect consumersRising levels of consumer debt, concerns about rising personal bankruptcyThe transformation wrought by new information technologyLecture 19: Forwards and FuturesForward contracts and their limitationsFutures contracts since Osaka in 1600sFair valueHedging functionFailure to hedgeLecture 20: Stock Index, Oil and Other Futures MarketsThe history of commodity futuresThe evolution since 1980 of financial futuresStock index futuresInterest rate futuresOil as a fundamental factor in world economyInnovation in the futureLecture 21: Options MarketsDefinition of optionsBlack-Scholes formulaChicago Board Options ExchangeThe use of options in hedging and speculationIncreasing scope of options contracts in the futureLecture 22: Other Derivative MarketsSwaps, SwaptionsMacro Securities and the American Stock ExchangeLecture 23: Stock Market Booms & CrashesStock market crash of 1929Stock market crash of 1987Mexican Crisis 1994Asian financial crisis 1997-1998Nasdaq crash 2000-2001Role of financial innovations in these crashes and in their likelihood in the futureIn Memoriam: Brad Hoorn Economics 252b Spring 2001Graduated Yale 2001Worked Fred Alger Management, 93d Floor, World Trade Center, North Tower, Research Associate, Investment Management35 of the 38 Alger employees at WTC were lost.