Financial Theory (with John Geanakoplos)
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.This Yale College course was recorded in Fall 2009.
Lecture 1 - Why Finance?
This lecture gives a brief history of the young field of financial theory, which began in business schools quite separate from economics, and of my growing interest in the field and in Wall Street. A cornerstone of standard financial theory is the efficient markets hypothesis, but that has been discredited by the financial crisis of 2007-09. This lecture describes the kinds of questions standard financial theory nevertheless answers well. It also introduces the leverage cycle as a critique of standard financial theory and as an explanation of the crisis. The lecture ends with a class experiment illustrating a situation in which the efficient markets hypothesis works surprisingly well.
John Geanakoplos, Financial Theory (Yale University: Open Yale Courses), http://oyc.yale.edu
License: Creative Commons BY-NC-SA 3.0
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- Lecture 2 - Utilities, Endowments, and Equilibrium
- Lecture 3 - Computing Equilibrium
- Lecture 4 - Efficiency, Assets, and Time
- Lecture 5 - Present Value Prices and the Real Rate of Interest
- Lecture 6 - Irving Fisher's Impatience Theory of Interest
- Lecture 7 - Shakespeare's Merchant of Venice and Collateral, Present Value and the Vocabulary of Finance
- Lecture 8 - How a Long-Lived Institution Figures an Annual Budget. Yield
- Lecture 9 - Yield Curve Arbitrage
- Lecture 10 - Dynamic Present Value
- Lecture 11 - Social Security
- Lecture 12 - Overlapping Generations Models of the Economy
- Lecture 13 - Demography and Asset Pricing
- Lecture 14 - Quantifying Uncertainty and Risk
- Lecture 15 - Uncertainty and the Rational Expectations Hypothesis
- Lecture 16 - Backward Induction and Optimal Stopping Times
- Lecture 17 - Callable Bonds and the Mortgage Prepayment Option
- Lecture 18 - Modeling Mortgage Prepayments and Valuing Mortgages
- Lecture 19 - History of the Mortgage Market: A Personal Narrative
- Lecture 20 - Dynamic Hedging
- Lecture 21 - Dynamic Hedging and Average Life
- Lecture 22 - Risk Aversion and the Capital Asset Pricing Theorem
- Lecture 23 - The Mutual Fund Theorem and Covariance Pricing Theorems
- Lecture 24 - Risk, Return, and Social Security
- Lecture 25 - The Leverage Cycle and the Subprime Mortgage Crisis
- Lecture 26 - The Leverage Cycle and Crashes