Questions tagged [finance]

Finance describes the management, creation and study of money, banking, credit, investments, assets and liabilities that make up financial systems, as well as the study of those financial instruments.

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Logic behind uncovered interest rate parity?

So I am having trouble understanding the UIP equilibrium condition. Namely, according to UIP, when the home country has a higher interest rate than the foreign country, its currency will depreciate ...
Nixy 124's user avatar
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Why is the portfolio weight of the risk-free asset capped at 1?

I am reading Investment Science by David Luenberger, and in it he creates a portfolio with a risk-free asset and a risky asset. α is the weight of the risk-free asset, and he sets α ≤ 1. Why is that? ...
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How much of a bond do the market makers typically hold?

Market makers facilitate a bond issuance by providing somewhere to both buy and sell the bonds of a bond issuance. I'm trying to understand how the market makers (i.e. the security underwriters such ...
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Does the discounted dividend model assume a stock underperforms the risk-free rate?

I'm trying to understand intuitively why the stock market as a whole has outperforms the risk-free rate over time. I started by looking at the discounted dividend model which is one of the few things ...
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Macro papers that an undergrad would be able to replicate

I'm writing my bachelor's thesis this spring, and would like to do it by replicating a modern empirical paper in either macro or finance. I've tried to find a paper by skimming through renowned ...
elaia's user avatar
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Fake long-term deposits

Story#1 Say banks have two saving options for you: one-year option or month-by-month flex option. Say the flex option give a annualized rate of 2 percent, and the one-year option gives 5 percent (...
High GPA's user avatar
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Why is eurodollar future so popular

It's well-know that eurodollar futures contracts are the most liquid contracts in the world. Traders use them to express views on interest rates or hedge interest rate risks. My questions is why are ...
Matt Frank's user avatar
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Calculating Effective Maturity with Negative Cash Flows

The formula for effective maturity. Suppose that an installment plan also shows additional borrowings of a debtor. That is, at some point in time (other than the inception date) the borrower is given ...
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Why is the Modigliani-Miller theorem logical?

Quoting this SE question, who put it nicely, the M&M theorem basically states that: ...in a no-frictions world, two identical firms have the same enterprise value, regardless of their financial ...
snatchysquid's user avatar
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Calculating the value of this asset

calculate the cash value of a financed asset that is paid in the following way: an initial payment of 500,000, in month 2 a payment equal to half its value, in month 7 a payment equal to a third of ...
VOZ ESTOICA's user avatar
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Digital Impact on External Audit?

Do any of you have theses, research papers, or articles related to the topic of 'Digital Impact on External Audit'? I am a Ph.D. student, and I have been struggling to find a professor to supervise my ...
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Future value of a "future" investment

Consider the following well-known simple exercise : You have a loan outstanding. It requires making three annual payments at the end of the next three years of $1,000 each. Your bank has offered to ...
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Was must we invest in the highest NPV project?

I have this simple problem about Net Present Value (NPV) and I was wondering why should we maximise it. Suppose you have a firm and you can either sell it now for $ \\\$ $ 200.000 or invest $ \\\$ $30....
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What, quantitatively, is the problem with treating two conceptually nearby trading indicators as independent pieces of evidence?

Suppose you come across a financial trading system which starts by checking a security's 200-Period Moving Average, either by itself or in conjunction with the security's price data, perhaps signaling ...
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Price discrepancy between the same company's stock on two exchanges

The graph shows a company's stock prices on two exchanges: New York Stock Exchange (NYSE) and Oslo Stock Exchange (OSE). Since these prices are denominated in different currencies, the NYSE price is ...
Richard Hardy's user avatar
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Does the near-zero value of Fannie and Freddie shares indicate the validity of the Discount Dividend Model?

The Discount Dividend Model posits that the value of equities is equal to the discounted value of future dividend payments of a firm; for a firm that doesn't pay a dividend, you presume that they are ...
coMPUTER sCIENCE sTUDENT's user avatar
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How to prove the value of a European Call Option is convex on the underlying’s price?

I know the payoff of a European Call at expiration is $\max\{S_T - K,0\}$, where $S_T$ is the underlying price at expiration and $K$ is the strike price. I want to prove convexity of the value of a ...
Nicolas Torres's user avatar
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Funding the American Economy During the Gilded Age

Does anyone know how John Pierpont Morgan Sr. funded the American economy during the Gilded Age? I'd like to learn about his methods and the significant role he played in shaping the economy through ...
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Show withdraw funds from trading account in Google Sheets

I am tracking my portfolio in Google Sheets. I have columns like daily NLV, % and value change etc. This stats are used to calculate some extra data and draw performance charts. Now, I want to ...
vlad popov's user avatar
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Stochastic discount factor derivation

What are the intermediate steps to arrive at equation (4) in Lettau and Wachter 2007? Here is the paper: https://drive.google.com/file/d/1Bc0oOqKGm0otYbywf5gdfwzpRpA-D11p/view I am confused why there ...
liss559's user avatar
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Habit formation ala Constantinides (1990)

Consider the following problem, from Constantinides (1990). \begin{align} V(W_0, x_0) \equiv \max_{c, \alpha} \mathrm{E}_0 \int_0^\infty e^{-\rho s}\gamma^{-1}[c(s) - x(s)]^\gamma \mathrm{d}s, \end{...
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In bond markets, how does the number of banks in an underwriter syndicate grow as they share risk on larger deals?

If I look at a large collection of underwriter syndicates (underwriting green bond issuances), I can see there is, on the whole, a quadratic relationship between the value $v$ in USD that the ...
apg's user avatar
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What would be a truly universal currency?

I have no clue where to ask this, so here it goes... With the advent of LK99 and its potential uses in recent solutions for modified Alcubierre drive fields, it pushes me to wonder: What if humanity ...
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How to calculate returns for other frequencies?

Hey am newb started studying economics I have questions about returns of any asset I know how to calculate annualized returns by (1+returns)^(1/N)-1=annualized_returns N=number of periods Let's say I ...
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Do market volatility and optimal trade confirmation strength correlate?

In this video, it is suggested that in high volatility markets, trading algorithms which wait for more confirmation to buy perform better than trading algorithms which buy more quickly, while in low ...
user10478's user avatar
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Implications for the economics literature of possible mistakes in Black-Scholes-Merton option pricing?

If this preprint (which is discussed here on QSE) is correct in showing that there are mathematical mistakes in the Black-Scholes-Merton option pricing framework, are there strands of the economic ...
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Testing asset pricing models with Roll's critique in mind

Roll's critique (Roll, 1977) can be summarized as follows (quoting Wikipedia): Mean-variance tautology: Any mean-variance efficient portfolio $R_{p}$ satisfies the CAPM equation exactly: $$ E(R_{i})-...
Richard Hardy's user avatar
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Accounting for differences in average teacher salaries, adjusted for inflation and the cost of living in each state

My aim is to determine whether teacher salaries in all 50 of the United States over between 2013 and 2023—adjusted for inflation and the cost of living—differ significantly. I would like to ask what ...
Nazarene's user avatar
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How to get range of possible returns on market portfolio from two points on minimum variance frontier

I am revising for an exam in financial economics and have come across this part paper question, which has left me completely stuck: "Consider a CAPM economy with just three risky assets, A, B, ...
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Exchange economy with two agents, what's the competitive equilibrium?

I'm currently doing this assignment but I'm keep getting stuck by this question. I put the Lagrange function for both agents and get the MRS / Price ratio but what should I do from there?
carlos21's user avatar
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Corporate finance thesis on financial constraints and investment

I am currently writing a masters thesis within corporate finance and am seeking help to understand some concepts and theories in regards to some regression results i have obtained through empirical ...
Pythonnoob's user avatar
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how to forecast smaller balance sheet items

How might you forecast smaller line items on the balance sheet? For example like current liabilities, current portion of long-term debt or notes payable when doing a 3-statement model? Would it be ...
user19251203's user avatar
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1 answer
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Why can't retail investors directly purchase from a stock exchange?

Instead investors must use a stock brokerage as a middleman. Why is the stock brokerage necessary?
JobHunter69's user avatar
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2 answers
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General Solution Differential Equation

We have the following system of ordinary differential equation. To solve this using diagonlsation we do the following. My concern is that my general solution is a subtly different result, I've checked ...
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Meaning of $\frac{A}{r}$ in standard debt model:

Given the model of debt and repayments given by the first-order linear ordinary differential equation (ODE): $\frac{dD}{dt} - rD = -A$ In this model, $D(t)$ represents the consumer's debt at time $t$, ...
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Fama French 3 factor model paper on asset pricing anomalies

In their paper, "Multifactor explanations of asset pricing Anomalies (1996)" Fama french states in Table 6 that they observe a Momentum effect in their 12-2 portfolio because If I look at ...
glouis's user avatar
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Complete markets and convenience yields

I have been reading some papers on the safety/liquidity of US government debt and got a bit perplexed by the assumptions made in some of those papers. For example, this paper by Mehrotra and Sergeyev ...
Wittgenstein's Poker's user avatar
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Constructing Valuation As a Function of Condition

Suppose there is an item that deteriorates with use, its condition expressed as a number between $0$ (completely broken condition) and $1$ (perfect condition), for which I want to assign a monetary ...
user10478's user avatar
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1 answer
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[Hull]: Put Lower bound example confusing

I have the 9th edition of hull and reading up on options. Put options. I am reading Chapter 11 on page 240, section,on Lower Bound for European Puts on Non-Dividend-Paying Stocks. I'm confused by the ...
user43671's user avatar
1 vote
0 answers
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Testing equality of betas of multiple assets in the Capital Asset Pricing Model

I am trying to understand how I can test whether the factor loadings (Beta) in CAPM for different stocks are statistically different between each other. I.e. I have 3 stocks with different CAPM betas. ...
Marco's user avatar
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1 vote
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Why would a company file for bankruptcy now when it can always do so later?

Taking FTX as an example, I know they took depositors' funds, send them to SBF's other company Alameda Research which then made risky crypto investments and failed. This made FTX hold less assets than ...
Nicolas Torres's user avatar
1 vote
0 answers
12 views

Impact of US Monetary Policy on the Indian Economy

Why does an increase in the repo rate in the United States have an impact on the economy of India, even when India has raised its own repo rate? In other words, why is the monetary policy decision of ...
James Smith's user avatar
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1 answer
104 views

Ruling out corner solution in portfolio maximization problem

I am new to the econometric world. I have a portfolio maximization problem $$ \max \sum_{i}^ n a_{i} x_{i} \quad \text{s.t.} \quad \sum_{i}^n a_{i}=1, a_{i} \geq 0. $$ I solved the problem but I had a ...
A.F.R.S2022's user avatar
2 votes
1 answer
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Budget-feasible set in a portfolio choice problem

I am going through Duffie's Dynamic Asset Pricing book, and already ran into something that confused me on the third page. First, some definitions. Let $\{1, \cdots, S\}$ be a finite set of states, $D$...
Wittgenstein's Poker's user avatar
2 votes
2 answers
112 views

How to correctly calculate my real salary?

My salary is $900 after taxes. This is quite a large salary for my country. And when my parents found out about it, they said that I earn a lot. But in my opinion it is not so, because in order to do ...
Tamila Ambeon's user avatar
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1 answer
90 views

Real debt burden

Many economists believe real interest payments-to-GDP is a superior measure of debt service burden than nominal interest payments-to-GDP. My question is why we divide real interest payments by nominal ...
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What is the intuition behind the different information structures from the static to the continuous time ones?

It is a difficult and challenging problem at the same time, to model the information structure in theoretical models of economics and finance. The information structure in most of the literature is ...
Oliver Queen's user avatar
5 votes
1 answer
148 views

Trying to understand the notion of required return

I have been thinking about the notion of required return lately. I am not familiar with a formal definition, but I have tried to reason my way towards one. Please let me know if my approach makes ...
Richard Hardy's user avatar
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Deriving the CAPM: going from utility of consumption to utility of asset returns

Some textbook presentations of the capital asset pricing model (CAPM) take returns on stocks as a primitive and proceed as if agents derive utility from asset returns. Assuming a concave utility ...
Richard Hardy's user avatar
4 votes
2 answers
197 views

Applied financial econometrics textbook

I am looking for an applied financial econometrics textbook. There are plenty of textbooks that present time series models used in financial econometrics but few of them put any emphasis on ...
Richard Hardy's user avatar

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