Lecture Description
This lecture addresses some final points about the CAPM. How would one test the theory? Given the theory, what's the right way to think about evaluating fund managers' performance? Should the manager of a hedge fund and the manager of a university endowment be judged by the same performance criteria? More generally, how should we think about the return differential between stocks and bonds? Lastly, looking back to the lectures on Social Security earlier in the semester, how should the CAPM inform our thinking about the role of stocks and bonds in Social Security? Can the views of Democrats and Republicans be reconciled? What if Social Security were privatized, but workers were forced to hold their assets in a new kind of asset called PAAWS, which pay the holder more if the wage of young workers is higher?
Course Index
- Why Finance?
- Utilities, Endowments, and Equilibrium
- Computing Equilibrium
- Efficiency, Assets, and Time
- Present Value Prices and the Real Rate of Interest
- Irving Fisher's Impatience Theory of Interest
- Shakespeare's Merchant of Venice, Collateral. Present Value and the Vocabulary of Finance
- How a Long-Lived Institution Figures an Annual Budget. Yield
- Yield Curve Arbitrage
- Dynamic Present Value
- Social Security
- Overlapping Generations Models of the Economy
- Demography and Asset Pricing: Will the Stock Market Decline when the Baby Boomers Retire?
- Quantifying Uncertainty and Risk
- Uncertainty and the Rational Expectations Hypothesis
- Backward Induction and Optimal Stopping Times
- Callable Bonds and the Mortgage Prepayment Option
- Modeling Mortgage Prepayments and Valuing Mortgages
- History of the Mortgage Market: A Personal Narrative
- Dynamic Hedging
- Dynamic Hedging and Average Life
- Risk Aversion and the Capital Asset Pricing Theorem
- The Mutual Fund Theorem and Covariance Pricing Theorems
- Risk, Return, and Social Security
- The Leverage Cycle and the Subprime Mortgage Crisis
- The Leverage Cycle and Crashes
Course Description
This course attempts to explain the role and the importance of the financial system in the global economy. Rather than separating off the financial world from the rest of the economy, financial equilibrium is studied as an extension of economic equilibrium. The course also gives a picture of the kind of thinking and analysis done by hedge funds.
Course Structure:
This Yale College course, taught on campus twice per week for 75 minutes, was recorded for Open Yale Courses in Fall 2009.