Центральный Дом Знаний - R.E. Bailey. The Economics of Financial Markets (2005)

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R.E. Bailey. The Economics of Financial Markets (2005)

R.E. Bailey. 

 The Economics of Financial Markets presents a concise overview of capital markets, suitable for advanced undergraduates and for embarking graduate students in financial economics. Following a brief overview of financial markets – their microstructure and the randomness of stock market prices – this textbook explores how the economics of uncertainty can be applied to financial decision making.  

Contents

List of figures page xv

Preface xvii

1 Asset markets and asset prices 1

1.1 Capital markets 2

1.2 Asset price determination: an introduction 5

1.3 The role of expectations 9

1.4 Performance risk, margins and short-selling 11

1.5 Arbitrage 15

1.6 The role of time 20

1.7 Asset market efficiency 22

1.8 Summary 23 Appendix 1.1: Averages and indexes of stock prices 24 Appendix 1.2: Real rates of return 28 Appendix 1.3: Continuous compounding and the force

of interest 29

References 32

2 Asset market microstructure 33

2.1 Financial markets: functions and participants 34

2.2 Trading mechanisms 36

2.3 Industrial organization of financial markets 41

2.4 Trading and asset prices in a call market 45

2.5 Bid-ask spreads: inventory-based models 48

2.6 Bid-ask spreads: information-based models 49

2.7 Summary 52 References 54

3 Predictability of prices and market efficiency 56

3.1 Using the past to predict the future 57

3.2 Informational efficiency 64

3.3 Patterns of information 70

3.4 Asset market anomalies 72

3.5 Event studies 75

3.6 Summary 77 Appendix 3.1: The law of iterated expectations

and martingales 79

References 81

4 Decision making under uncertainty 83

4.1 The state-preference approach 85

4.2 The expected utility hypothesis 90

4.3 Behavioural alternatives to the EUH 98

4.4 The mean-variance model 101

4.5 Summary 105 Appendix 4.1: Useful notation 107 Appendix 4.2: Derivation of the FVR 108 Appendix 4.3: Implications of complete asset markets 109 Appendix 4.4: Quadratic von Neumann-Morgenstern utility 110 Appendix 4.5: The FVR in the mean-variance model 111 References 112

5 Portfolio selection: the mean-variance model 114

5.1 Mean-variance analysis: concepts and notation 115

5.2 Portfolio frontier: two risky assets 118

5.3 Portfolio frontier: many risky assets

and no risk-free asset 121

5.4 Portfolio frontier: many risky assets

with a risk-free asset 125

5.5 Optimal portfolio selection in the mean-variance model 131

5.6 Summary 133 Appendix 5.1: Numerical example: two risky assets 134 Appendix 5.2: Variance minimization: risky assets only 135 Appendix 5.3: Variance minimization with a risk-free asset 139 Appendix 5.4: Derivation of До> = PjPaPAaj 140 Appendix 5.5: The optimal portfolio with a single risky asset 141 References 142

6The capital asset pricing model 143

6.1 Assumptions of the CAPM 144

6.2 Asset market equilibrium 145

6.3 The characteristic line and the market model 149

6.4 The security market line 151

6.5 Risk premia and diversification 154

6.6 Extensions 157

6.7 Summary 159 Appendix 6.1: The CAPM in terms of asset prices 160 Appendix 6.2: Linear dependence of Sj in the CAPM 162 Appendix 6.3: The CAPM when all assets are risky 162 References 165

7 Arbitrage 166

7.1 Arbitrage in theory and practice 166

7.2 Arbitrage in an uncertain world 168

7.3 State prices and the risk-neutral valuation relationship 173

7.4 Summary 176 Appendix 7.1: Implications of the arbitrage principle 177 References 182

8 Factor models and the arbitrage pricing theory 183

8.1 Factor models 184

8.2 APT 187

8.3 Predictions of the APT 190

8.4 Summary 194 Appendix 8.1: The APT in a multifactor model 195 Appendix 8.2: The APT in an exact single-factor model 197 References 199

9 Empirical appraisal of the CAPM and APT 200

9.1 The CAPM 201

9.2 Tests of the CAPM: time series 202

9.3 Tests of the CAPM: cross-sections 206

9.4 Sharpe ratios and Roll's criticism 214

9.5 Multiple-factor models and the APT 215

9.6 Summary 219 Appendix 9.1: The Black CAPM in terms of excess returns 220 References 221

10 Present value relationships and price variability 222

10.1 Net present value 223

10.2 Asset price volatility 228

10.3 Behavioural finance, noise trading and models of

dividend growth 235

10.4 Extreme asset price fluctuations 237

10.5 Summary 243 Appendix 10.1: Present values in continuous time 245 Appendix 10.2: Infinitely lived assets: constant growth 246 Appendix 10.3: The RNVR with multiple time periods 246 References 248

11 Intertemporal choice and the equity premium puzzle 250

11.1 Consumption and investment in a two-period world

with certainty 251

11.2 Uncertainty, multiple assets and long time horizons 254

11.3 Lifetime portfolio selection 258

11.4 The equity premium puzzle and the risk-free rate puzzle 262

11.5 Intertemporal capital asset pricing models 269

11.6 Summary 273 Appendix 11.1: Intertemporal consumption and portfolio

selection 274

Appendix 11.2: Simplifying the FVR 276

Appendix 11.3: The consumption CAPM 278

References 280

12 Bond markets and fixed-interest securities 281

12.1 What defines a bond? 282

12.2 Zero-coupon bonds 286

12.3 Coupon-paying bonds 291

12.4 Bond valuation 295

12.5 Risks in bond portfolios 297

12.6 Immunization of bond portfolios 298

12.7 Summary 300 Appendix 12.1: Some algebra of bond yields 302 References 305

13 Term structure of interest rates 306

13.1 Yield curves 307

13.2 Index-linked bonds 310

13.3 Implicit forward rates 313

13.4 The expectations hypothesis of the term structure 317

13.5 Allowing for risk preferences in the term structure 322

13.6 Arbitrage and the term structure 326

13.7 Summary 328

Appendix 13.1: The expectations hypothesis

with explicit uncertainty 329

Appendix 13.2: Risk aversion and bond portfolios 331

References 334

14 Futures markets I: fundamentals 336

14.1 Forward contracts and futures contracts 337

14.2 The operation of futures markets 342

14.3 Arbitrage between spot and forward prices 349

14.4 Arbitrage in foreign exchange markets 354

14.5 Repo markets 355

14.6 Summary and conclusion 357 Appendix 14.1: Forward and futures prices 359 Appendix 14.2: Revaluation of a forward contract 360 References 362

15 Futures markets II: speculation and hedging 363

15.1 Speculation 363

15.2 Hedging strategies 365

15.3 Optimal hedging 374

15.4 Theories of futures prices 378

15.5 Manipulation of futures markets 383

15.6 Summary 386 Appendix 15.1: Futures investment as portfolio selection 387 Appendix 15.2: Derivation of h 390 References 392

16Futures markets III: applications 393

16.1 Weather futures 393

16.2 Financial futures contracts 397

16.3 Short-term interest rate futures 400

16.4 Long-term interest rate, or bond, futures 404

16.5 Stock index futures 406

16.6 The fall of Barings Bank 412

16.7 Summary 414 References 416

17    Swap contracts and swap markets 417

17.1 Swap agreements: the fundamentals 417

17.2 Why do swaps occur? 423

17.3 Risks associated with swaps 429

17.4 Valuation of swaps 429

17.5 Metallgesellschaft: a case study 431

17.6 Summary 435

References 437

18 Options markets I: fundamentals 438

18.1 Call options and put options 439

18.2 Varieties of options 446

18.3 Option-like assets 448

18.4 Upper and lower bounds for option prices 449

18.5 Put-call parity for European options 454

18.6 The Modigliani-Miller theorem 457

18.7 Summary 459 Appendix 18.1: Lower bound for a European call

option premium 460 Appendix 18.2: Lower bound for a European put

option premium 461

Appendix 18.3: Put-call parity for European options 462

Appendix 18.4: The Modigliani-Miller theorem: a proof 463

References 466

19 Options markets II: price determination 467

19.1 The fundamentals of option price models 468

19.2 A two-state option-pricing model 471

19.3 The Black-Scholes model 480

19.4 Contingent claims analysis 486

19.5 Summary 490 References 492

20 Options markets III: applications 494

20.1 Stock index options 495

20.2 Options on futures contracts 496

20.3 Interest rate options 500

20.4 Options and portfolio risks 504

20.5 Portfolio insurance 507

20.6 Combinations and spreads 512

20.7 Summary 514 Appendix 20.1: Put-call parity for European options

on futures 515

References 518

Subject index 519

Author index 526

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