1 / 27

Economics 434 Theory of Financial Markets

Economics 434 Theory of Financial Markets. Professor Edwin T Burton Economics Department The University of Virginia. Administrative. Professor Burton returns Sept. 11 th Sunit Shah – Introduction UVA ‘01, B.A. Economics & Mathematics Work in finance: Modeling bond movements

anaya
Download Presentation

Economics 434 Theory of Financial Markets

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Economics 434Theory of Financial Markets Professor Edwin T Burton Economics Department The University of Virginia

  2. Administrative • Professor Burton returns Sept. 11th • Sunit Shah – Introduction • UVA ‘01, B.A. Economics & Mathematics • Work in finance: Modeling bond movements • Research in finance: Treasury bond auctions • UVA ’11, Ph.D. Economics • Fields: Finance, Industrial Organization, Econometrics • Dissertation in Game Theory

  3. Availability Professor Burton • Monroe Office: Room 262, 434-924-4054 • VNB Office: 1900 Arlington Blvd., Suite C, 212-731-2340 • Office Hours: 11am-12pm Tues/Thurs • Email: etb6d@virginia.edu Sunit Shah • Will hold Prof. Burton’s office hours in his Monroe office • Email: sunit@virginia.edu • Teaching Philosophy – Extending Small Class Principles

  4. Administrative • Add/Drop • Attendance = Mandatory • Class Website: http://people.virginia.edu/~etb6d/classes.htm • Syllabus posted on site w/ required readings • Additional course material to be posted here (textbook chapters, etc.)

  5. Course Overview Topics Covered • Fixed Income Markets • Modern Portfolio Theory • Leverage, Corp. Balance Sheets, Buyouts • Alternative Assets Pre-requisites: • Econ 3010 – Intermediate Micro • Econ 3030 – Money and Banking • Econ 3710 – Intro to Statistical Analysis • Questions/Concerns – See me (esp. xfer students)

  6. Grading Three Exams: • First mid-term – Thursday, October 11th • Second mid-term – Thursday, November 8th • Final – Wednesday, December 12th, 2pm - 5pm There is no “Dutch knockout” – you must take all exams Honor System • Applies to all graded assignments/exams • Conscientious Retraction Option

  7. Theory of Financial Markets Several types of financial markets • Stock (i.e. Equity) Market – most well-known • Bond Market (Fixed Income) Many others as well… • Commodity Market – corn, oil, electricity, gold, etc. • Derivatives Market – options, futures, etc. • Foreign Exchange Market – Euro, Yen, etc.

  8. Theory of Financial Markets First quarter of course covers bond market - but first, a review of US stock market history Dow Jones Industrial Average • Representation of the market as a whole • Began May 26th, 1896 at 40.94 • Over 13,000 today – increase of over 30,000%

  9. Dow Jones Industrial Average – 1900-2010

  10. Dow Jones Industrial Average – 1900-2010 Four Great Market Crashes

  11. Dow Jones Industrial Average – 1900-2010, Scaled Four Great Market Crashes

  12. 1900 - Setting the Context Very different climate than 2010 • Economically • No federal income tax; highest rate today = 35% • Federal debt = $2.6 B; today debt = $15,946 B • Politically • Only 45 states – states’ rights up for debate • 20 years before womens’ suffrage • Socially • 12 years before the Titanic • 16 years before radio tuners

  13. Dow Jones Industrial Average – 1900-1920 • Typical market behavior • General upward trend • Some volatility about trendline

  14. Dow Jones Industrial Average – 1920-1929 • “Roaring Twenties” • U.S. as world leader in wake of WWI • Decade of economic prosperity • Social and cultural advancement

  15. Dow Jones Industrial Average – 1929-1942 The Great Crash • Black Tuesday – October 29, 1929 • Market drops over 20% in two days and ~40% in one month • $1 invested in mid-September, 1929 stayed under $1 until November, 1954 • Ushered in the Great Depression

  16. Black Tuesday & The Great Depression Effects • U.S. unemployment rate rose to 25% (natural rate ~5%) • Industrial production dropped over 50% • Market dropped 89% from peak to valley • Global Depression – Affected all industrialized western nations Theories of cause: • Loose credit • Wealth disparities • Halt to int’l trade (Smoot-Hawley Tariff Act) • Poor policy

  17. The Recovery The “New Deal” • Vast increase in size and spending of government • Birth of entitlement programs (e.g., welfare, social security) • Wide spectrum of other programs as well (e.g., FDIC, SEC, TVA) • Effects ambiguous World War II • Dec. 7th, 1941 – Pearl Harbor; U.S. declares war the next day • Women join the workforce • Military spending increased significantly • Unemployment drops below 10% for first time since 1920s • Market trends upwards through mid-1960s

  18. Dow Jones Industrial Average – 1942-1966 The Recovery • Steady upward trend lasting two decades • Market climbs from about 100 to almost 1,000

  19. Dow Jones Industrial Average – 1966-1980 Market Stagnation • Vietnam War • 1973 oil crisis – OPEC constricts oil supply • “Stagflation” – High unemployment with high inflation • Emergence of new industrialized nations

  20. Dow Jones Industrial Average – 1980-1987 Early to Mid 80s • Longest Peacetime Economic Boom in US History • Theories of cause • Low tax rates & less government intervention • Market correction from lost potential of previous 15 years

  21. Dow Jones Industrial Average –1987 1987 • Black Monday – October 19, 1987 • Market drops 22.6% in one day (!!) • Shrouded in mystery • Full-year movement flat overall

  22. Dow Jones Industrial Average – 1988-2000 Late 80s and 1990s • Continued Economic Prosperity • Several Technological Advances, including Internet • Widely available venture capital allows Dot Com Bubble to form

  23. Dow Jones Industrial Average – 2001-2002 Dot Com Bubble Bursts • Loss of fundamental analysis – market correction • Market psychology

  24. Dow Jones Industrial Average – 2003-2008 The Housing Bubble • Fed lowers rates due to ‘01 crash – mortgages cheaper • Sharp increase in sub-prime lending (10% -> 20% in 2004)

  25. Dow Jones Industrial Average – 2008-2010 Another Bubble Bursts – Chain of Events: • Housing prices drop substantially starting in 2005 • Foreclosures increase dramatically by 2006 • Sub-prime lenders start to go under in late 2006 • Toxic assets pervasive throughout • banking industry – by 2008, • banks in trouble

  26. Government Action Government Gets Involved • March ‘08 – Gov’t negotiates Bear Stearns buyout • Sept ’08 • Gov’t allows Lehman to go under after 180 years in business • Fed attempts to coordinate private AIG bailout to no avail • Decides on public bailout for AIG – “too big to fail” • Oct ‘08 • Bush signs TARP into law • Treasury assumes 90% of risk for $300 billion of Citigroup’s assets • Dec ‘08 – Treasuries hit a negative yield (!!)

  27. Wrap-up Motivation for the Course • Better understanding of various assets, incl. what affects their market prices • Financial theory fundamentals, e.g.: • How should one construct an investment portfolio? • How does a company’s financial leverage affect its value? • Further discussion on financial market history (esp. ‘08)

More Related