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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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29
votes
6answers
10k views

Why do celebrities get high wages?

In the youtube video Why We Look down on Low Wage Earners the author argued: "economics states that wages are determined [...] by the number of people willing and being able to do a given job that ...
14
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0answers
393 views

How do I use the Malliavin calculus to solve for the optimal trading strategy in the classic Merton problem?

How do I use the Malliavin calculus to solve for the optimal trading strategy in the classic Merton problem? In Duffie's book "Dynamic Asset Pricing," he outlines the "Martingale method" of solving ...
13
votes
1answer
298 views

Barro's (2009) rare disaster model in the AER: How to derive equation (10)?

In Barro (2009) Rare disasters, asset prices and welfare costs Barro develops a Lucas tree model with Epstein-Zin preferences. My question concerns the paper's equation (10). In this equation Barro ...
8
votes
3answers
451 views

What are some theoretical explanations for deviations from the efficient market hypothesis?

According (the semi-strong form of) the efficient market hypothesis, the price of an asset should reflect all publicly available information about the 'fundamental value' of that asset. The reasoning ...
8
votes
4answers
212 views

Can absence of inflation be accounted for by a reconfigured class structure?

A previous and oft-heard question asked why no inflation results from the Fed pumping money into the economy. Are we simply seeing a methodical wage suppression, thus no official "inflation," while ...
8
votes
2answers
665 views

How is momentum justified as a common risk factor?

Momentum as a common risk factor? This question is partly a follow-up to another question found here. In this other question it was noted in momentum is difficult to explain as a common risk factor ...
8
votes
2answers
532 views

Examples of Factors in the ICAPM

The intertemporal capital asset pricing model (ICAPM) is different from the CAPM in that in the ICAPM, utility is conditioned on some set of state variables. The ICAPM results in a multifactor pricing ...
8
votes
1answer
108 views

What is the percentage of announced Merger & Acquistion deals actaully completed?

I am assuming that not all M&A deals announced are completed. There are factors such as anti trust laws and consumer protection agencies that legally prohibit the two companies from completing the ...
8
votes
0answers
255 views

Show that $W_t - \int_0^t \xi_s ds$ is forward-measure-Brownian

Definitions and stuff: Consider a filtered probability space $(\Omega, \mathscr F, \{\mathscr F_t\}_{t \in [0,T]}, \mathbb P)$ where $$T > 0$$ $$\mathbb P = \tilde{\mathbb P}$$ This is risk-...
7
votes
5answers
3k views

Does Inflation Make Money Eventually Worthless?

I used this calculator: http://www.buyupside.com/calculators/inflationjan08.htm to estimate the future worth of 100 dollars in 100 years at 2% inflation. Does this really mean that a decent meal at a ...
7
votes
6answers
1k views

What are alternative measures of risk?

In finance, the variance of the returns of a security are used as a proxy for the associated risk of the security. I've seen some books include sentences like "if you take variance as a measure of ...
7
votes
4answers
1k views

Mathematical open problems that (when answered) might unlock MAJOR mathematical (micro)economics/finance/econometrics discoveries

Are there any (specific) math open problems that mathematical (micro)economics / finance / econometrics researchers wish mathematicians could solve for their discoveries to flourish? If positive, ...
7
votes
1answer
982 views

Deriving the Modigliani--Miller Theorem

In the Wikipedia article on the Modigliani--Miller theorem, it states two propositions. (It gives the cases of with and without taxes. Here I'll just focus on the case without taxes.) The first ...
7
votes
1answer
153 views

Pricing a European call option while absence of arbitrage is violated

Assume that we have a general one-period market model consisting of d+1 assets and N states. Using a replicating portfolio $\phi$, determine $\Pi(0;X)$, the price of a European call option, with ...
7
votes
2answers
230 views

Do stock markets price in existential risk (i.e. global nuclear war)?

Question Moved from Money StackExchange: https://money.stackexchange.com/questions/74002/do-stock-markets-price-in-existential-risk-i-e-global-nuclear-war Q: Do stock markets price in existential ...
7
votes
2answers
340 views

Problem with defining liquidity

I have heard multiple times that a consistent definition of liquidity does not exist. The two wikipedia articles describing liquidity (Market liquidity and accounting liquidity) lack a discussion of ...
6
votes
3answers
5k views

What institutions are examples of “shadow banking”?

I often hear the term shadow banking tossed around when discussing the United States and Chinese economies. What exactly is shadow banking and could you give examples of some specific companies that ...
6
votes
3answers
191 views

What is the equation $\mathbb{E}[mR]=1$?

I have just joined this Stack Exchange site and I was reading the following question: What are the foundational equations of Economics?. I have seen a couple of times the following equation in that ...
6
votes
1answer
46 views

What is the mix of maturities of outstanding US Treasury bonds called?

What is the technical term for the mix of maturities of outstanding US Treasury bonds? Also, is there an "official" source for this information? I tried searching to find out, but not knowing what ...
6
votes
3answers
536 views

Who created the concept of “present value”?

I cannot find anything on this online. The wikipedia article is purely technical, except by a mention that such system was used in England in early 16th century. Do you know who was the first to come ...
6
votes
2answers
204 views

What possible reasons could make arbitrage impossible between some markets?

What could prevent arbitrage (not necessarily risk-free) between some markets even when price differences exist?
6
votes
2answers
165 views

Unintended consequences from “fixing” the US financial system

Last year, I read the book The Bankers' New Clothes: What's Wrong with Banking and What to Do about It. The book explained some of the causes of the recent financial crisis of 2007-2009 and gave some ...
6
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2answers
115 views

How will London's role as a financial center be affected after the Brexit and what are possible alternatives?

I looked around on this site and couldn't find anything close to what I'm asking on Economics SE, so I hope it is the right place to ask. I am interested in but have no background in economy, so all ...
6
votes
1answer
225 views

Optimal consumption in Merton-like portfolio choice model with constant wage

My Questions Consider the following problem. It is almost identical to the classic Merton portfolio choice problem. Here I'm solving it using the so-called Martingale method. I have provided my ...
6
votes
0answers
54 views

Futures Market Books

Are there any recommendation for futures market or commodity trading books? I am not interested in trading myself, but would like to have a better understanding of it for my research.
5
votes
2answers
110 views

How could Greece-related worries drive US stocks down about 2% in a day?

Major US stock indices are down ~2% on Jun 29, and it's mostly associated with investor's worries related to the Greece crisis. I understand about possible "chain reaction" and that a lot of ...
5
votes
3answers
158 views

Why use marginal rather than average tax rates in incentive analysis?

Why do tax analysts worry about marginal tax rates, not average effective rates, in looking for incentive effects of taxes
5
votes
3answers
1k views

Why was Modigliani-Miller so relevant and innovative when it came out?

The Modigliani-Miller theorem*, a foundation of modern corporate finance, basically states that, in a no-frictions world, two identical firms have the same enterprise value, regardless of their ...
5
votes
2answers
642 views

Dealing with Missing Data when Testing the CAPM

Question How should I deal with missing data when trying to test the CAPM? Specifically, there are some stocks that are newly listed and/or delisted at any time. I don't want to exclude assets for ...
5
votes
1answer
151 views

Why is JPY considered a “safe currency”?

When the economic prospect around the world feels getting worse and/or getting higher uncertainty, usually the value of JPY is getting higher, because investors are said to start to buy JPY to shelter ...
5
votes
1answer
1k views

Apply Ito's Lemma to exponential martingale

$\newcommand{\dd}{\, \mathrm{d}}$ Consider the exponential martingale, $$ \xi_t^\lambda = \exp \left\{ - \int_0^t \lambda_s \dd z_s - \frac 12 \int_0^T \lambda_s^2 \dd s \right\}, $$ that is used in ...
5
votes
1answer
689 views

What is the significance of the Hansen-Jagannathan bound?

The Wikipedia article on the Hansen-Jagannathan bound is short, giving only the following: Hansen–Jagannathan bound is a theorem in financial economics that says that the ratio of the standard ...
5
votes
3answers
246 views

Is money mostly created (out of nothing) by banks making loans?

In the Bank of England's Quarterly Bulletin, 2014 Q1, McLeay, Radia, & Thomas write a pair of articles titled: "Money in the modern economy: an introduction" and "Money creation in the modern ...
5
votes
2answers
94 views

Any major theory/model that considers return due to idiosyncratic risk?

Are there any classical, major theories/models that consider positive return due to idiosyncratic risk? For example, CAPM only considers return due to systemic risk but not idiosyncratic risk. If ...
5
votes
2answers
209 views

Foundational equations or concepts of Finance

For the other sciences it´s easy to point to the most important equations, inequalities, propositions or concepts that ground the discipline. If I want to explain Finance to a physicist say, what are ...
5
votes
1answer
94 views

Finding a maximal growth portfolio

I have the following problem that asks me to solve for the "maximal growth portfolio." Suppose that the equilibrium stochastic discount factor evolves as $$ \log S_{t+1} - \log S_t = \kappa_s(X_t,...
5
votes
1answer
252 views

Yield and interest rate?

Are they the same thing? Is yield the annualized return rate? Why when yield rise, yearly return increases but price falls?
5
votes
1answer
560 views

How to measure Tobin's q?

How do people calculate Tobin'q empirically? Does anyone use it to make investment decisions? In particular, the version I learnt has no company debt involved with only capital under consideration, ...
4
votes
2answers
325 views

Prove that variance of a portfolio cannot exceed variance of individual assets

When reading on Markowitz's portfolio theory, I stumbled across the fact that in a market with two risky assets, if no short selling is not allowed, the variance of a portfolio consisting of the two ...
4
votes
2answers
158 views

How did the derivatives market 'collapse' in 2008?

I just watched the film 'The big short', and have been trying to think in context with the financial markets in 2008. I think the film does a great job of explaining how sub-prime mortgages came to be ...
4
votes
2answers
88 views

How does a refinance allow a mortgage to be repaid?

A textbook I'm reading states (talking about the years leading up to the financial crisis): As long as housing prices increased, these mortgages were secure: the borrower rapidly ...
4
votes
1answer
1k views

Best resources to self-educate myself in economics

I want to learn Economics by myself and I'm looking to build a path with people who're in this field to how and in what order should I learn Economics, I did some research and I've found many ...
4
votes
5answers
1k views

Basic question: why do markets grow?

I apologize if this is gonna be very basic, but I am a beginner. My question is: why do markets (expressed as indices) grow? Is it because money is constantly moved from the real economy into stock ...
4
votes
2answers
271 views

Black-Litterman---in what way are expected returns hard to estimate?

In the Wikipedia article about the Black-Litterman model, it states that the motivation behind model is that "it is difficult to come up with reasonable estimates of expected returns." Why is it that ...
4
votes
1answer
149 views

Deriving and using the pricing equation

I'm a mathematician who's trying to learn some economics from Cochrane's Asset Pricing book. I don't have any background in economics. In chapter 1, he derives the basic pricing equation $$ p_t = \...
4
votes
2answers
73 views

Do the number of days in a month affect monthly return? (seasonality)

When I see data like monthly return on news or tv, I always find the concept a bit strange, because obviously if you calculate monthly return for February and March, all things being equal, the ...
4
votes
1answer
46 views

2010 flash crash: cause and rationale for illegality

A British trader has been arrested on accusations of having triggered the 2010 "flash crash" that saw the Dow plummet by 600 points in 20 minutes. This is reported, for example, here (BBC), or here (...
4
votes
1answer
2k views

Difference between double auction and continuous double auction?

What is the difference between double auction and continuous double auction? Sometimes I feel that they were types of two-sided auction but sometimes I feel as if they were two separate concepts.
4
votes
1answer
473 views

Demand Curves for Stocks

i am currently working on a paper on demand curves for stocks and have some questions. I've read that many models (CAPM, APT, Modigliani-Miller theorem) assume demand curves for stocks to be flat. Can ...
4
votes
1answer
74 views

Optimal price function: application of calculus of variations

The problem, I am trying to solve is based on the paper by Rochet and Vila 1994 (see literature below). In fact, it is a variant of the seminal paper of Kyle 1985 in the finance/economics literature. ...