Questions tagged [financial-economics]

A branch of economics that analyzes the use and distribution of resources in markets in which decisions are made under uncertainty.

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8 views

Risks Quantification (soft question)

Can anyone please recommend literature (books, papers, whatever) on the topic of risk quantification? By risk quantification I mean financial assessment of e.g. credit or market risk. Free sources ...
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Assessing the ability of dividend yields to predict stock returns using out-of-sample forecast errors

In Introduction to Econometrics, 3rd Edition, by Stock and Watson, there is a short example about evaluating the ability of using dividend yields (current dividends over price) to predict future stock ...
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Why has gold dropped during the same week as Deutches Bank faces great difficulties

I chose the phrasing "great difficulties" to be polite. The "capital release unit" seems to be a bit of a desperate action from the bank, coupled with further complications involving bad press made ...
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Application of 'Fermi's Golden Rule' to Economics

Wikipedia says: 'Fermi's golden rule describes a system which begins in an eigenstate, ${\displaystyle |i\rangle } |i\rangle$ , of an unperturbed Hamiltonian, $H_0$ and considers the effect of a ...
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How to interpret the (expected) exposure and CVA of an option or a single share

I have a quick (hopefully simple) question regarding the interpretation of the expected exposure of a call option and a single share. I've done some computations on the formula for the expected ...
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25 views

How to calculate cost of equity?

So i have this question on leverage and cost of capital: Leverage and the cost of capital Gamma Airlines has an asset beta of 1.5. The risk-free interest rate is 6%, and the market risk premium is 8%....
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Two periods two agents; savings and interest rate problem

I am trying to answer the following question but not getting the right result Note: I use v and u interchangeably in my notation In previous problems I simply used the Euler equation approach in the ...
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Calculation of Inflation and purchasing power

kindly I'm stuck in this problem instead of many attempts through net present value and other discounted cash flow methods, some one could give me a detailed information and answers on this problem : (...
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What is the effect on money multiplier of the following three cases?

Assuming ceterus paribas in each case: (i)The bank expands its operations in the field of financial derivatives. (ii) Increasing competition leads to a fall in the transaction costs incurred by ...
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Under what conditions should the External Rate of Return (ERR) be used instead of Net Present Worth (NPW) and vice versa?

I have just read the concept of both Net Present Worth (NPW) and the External Rate of Return (ERR). This is what I have understood of these two values: NPW is the net discounted value of all the cash ...
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Is there a standard methodology for calculating real prices?

Is there an established professional standard used by economic / financial institutions for including or excluding i) the starting year/period, and ii) the end year/period when calculating real prices ...
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Impact of increasing deferred payment days on independence index?

I am trying to answer the following question. Let's say I let the deferred payment days from 30 to 90, so that my clients will have more days to pay the good I am selling. How this change will effect ...
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Financial economics: Bond Price

I know that if the coupon rate on a bond is larger than the yield-to-maturity, then the price must be higher than the par value. Yet I have the bond price equation $P=\frac{c}{y}\left(1-\frac{1}{(1+y)^...
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Relation between Captial Market Line and Security Market Line

I am referring to the book, "William Sharpe et al, Investments, 6th Edition. I am trying to wrap my head around some lines from the book, pertaining to Security Market Line. It reads, "Earlier it ...
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Lehman brothers bond rating

Correct me if I'm wrong, but as far as I understand one of the greatest causes of the 2008 financial crisis revolved around the way Lehman brothers where rating mortgage-backed securities (giving a ...
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On a statement of Harry Browne (revised)

I am reading a book on an investment strategy proposed by Harry Browne (1999, Fail-Safe Investing: Lifelong Financial Security in 30 minutes, pp. 39–40) known as the "permanent portfolio". He makes ...
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What does it mean when a discount lender “rediscount[s] reserves”?

I was reading a wikipedia article about the evolution of global financial system: https://en.wikipedia.org/wiki/Global_financial_system#Interwar_period:_1915%E2%80%931944. In the passage about the ...
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Best financial model to proportionally distribute the company's income to all employees?

I'm planning to start a project of something "innovative". And among some of the parts of the project that I'm thinking about, it's in the term of how money (profits) should be distributed. The truth ...
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Why not 2cov in this question?

Okay, So this is the whole question. It's a bit far. But i just have one question about it: So in question c) we have the equation for the sharpe ratio as: $$\frac{E(w_1R_{1A} + w_2R_{2A})}{\...
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Bond pricing, why t=3?

In question c-f. .Why do they calculate $t=3$? When they say $t=4$ at the beginning and then next year is $t=4+1=t=5$
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Bond pricing, compute YTM … why t not = 2?

Consider a two-period corporate bond with the following characteristics. The bond was issued at $t = 0$ with face value $FV = 100$ at $t = 2$. In period $t = 1$ and $t = 2$ coupons of $5$ are paid out ...
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Showing that a market model has arbitrage and describing martingales

This is an exercise which I came upon while studying an introduction to financial mathematics. Exercise : Consider the finite sample space $\Omega = \{\omega_1,\omega_2,\omega_3\}$ and let $\...
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Why stochastic dominance is “stochastic”?

I think the CDF is pretty much fixed, so the FOSD (first order stochastic dominance) is pretty much non-stochastic. Why does it have a "stochastic" in its name?
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Why are future expenses considered less costly than expenses in the present?

I understand that future income is less valuable than income in the present because of the concept of present value, where money available today can be invested to earn interest or can be spent to ...
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111 views

Show that the dividend price ratio is a ARMA(p, q) process

Let the log dividend growth evolve according to $\Delta d_{t+1} = \epsilon_{d, t+1}$ where $\epsilon_{d, t+1}$ is just white noise. Let the log returns be $r_{t+1} = x_t + y_t + \epsilon_{r, t+1}$ ...
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Mean vs. variance - which is dominant?

I am currently trying to gain some basic understanding of the mean-variance tradeoff. However, since I do not have an economic education background, I am struggling with some issues. Currently I am ...
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Value of companies with circular ownership [duplicate]

Given two companies, total assets of $100 million each. Company 'A' owns \$50M of company 'B'. Company 'B' owns \$50M of company 'A'. If you look at the value of both companies do you ...
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Are there any countries in which post-dated cheques are commonly used in trade?

I am reposting from the Personal Finance & Money Stack Exchange because my question was flagged as being about economics and off-topic. The post-dated cheque is the most common payment instrument ...
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Devising a model for inflation for a closed points system

I am working on a project that involves points. The idea is that users will earn points and redeem them for certain rewards. The means via which the users earn are fairly limited (They can attend a ...
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Reading list for physics undergrad who'd like to cover the economics related to the hedge fund/ private equity field

I have had relatively little exposure to economics( nothing more than EC101) and would greatly appreciate help in answering the following questions: Which sections of economics are more or less ...
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What accounts for the high GDP of the United States?

Wikipedia defines GDP as: Measure of the market value of all final goods and services produced in a period (quarterly or yearly) of time. So, I take it that the total value of all goods (and ...
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Proof of DCF model by mathematical induction

I am confident with the concept of DCF. However, I wanted to check the following proof given that if investors hold a share in $ t $, sell it at $t+1$, receive dividend $\ D_{t+1} $ and the price at $...
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Compound interest ($r$ in terms of $\frac{dA}{dt}$)

Suppose the amount of money in bank account that is compounded annually is given by $A(t)$. The annual rate of interest is $r$. Find a relation between $\displaystyle\frac{dA}{dt}$ and $r$. My ...
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Growth in dividends will equal growth of earnings

Let $Div_t$ be the dividend per share at date $t$. $\displaystyle Div_t=\frac{\text{Earnings}_t}{\text{Shares Outstanding}_t}\times\text{Dividend Payout Rate}_t$ ------------------- (1) My textbook ...
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Why does the yield curve flatten?

I find the yield curve for bond rates confusing. For example, the current yield curve for US treasuries is shown below: The difference between the 10-year bond and the 30-year bond is tiny, just 0.15%...
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Prove that if a bond trades at a discount, its yield to maturity will exceed its coupon rate

Can someone give me a mathematical proof of this statement? If a bond trades at a discount, its yield to maturity will exceed its coupon rate.
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Present value of perpetual rise in income

If a student successfully completes an MBA program in 2 years, he will earn $50,000 more than what he could earn without the degree for his lifetime. Calculate the present value of this perpetual rise ...
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Good Europe focused economics blogs

Who can recommend any good blogs or other news sources on economics with a European view. I'm looking for something in the vein of FT, which is already an extremely good source, but I'd like to ...
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Why regulate the financial world rather than take over some of the services?

The government regulates some of the behavior of financial markets. Understandably, especially considering the crisis. But would it not be easier if the government overtook some of the aspects of the ...
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Kiyotaki-Moore v.s. Bernanke-Gertler-Gilchrist - what's the difference?

What are the key differences between (i) a model which features a "Kiyotaki-Moore collateral constraint"; and (ii) a model which incorporates a "financial accelerator" (a la Bernanke-Gertler-Gilchrist)...
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Gold charts on different currencies

I have this two charts of gold prices for the last 60 days. One is in Dollars and the other in Euros. Why they are not an exact match?
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what are the categorization by industry in economics?

I wanted to know what industries are there from an economics point of view, and how each industry branches into different parts. Just categories and names will do , or if you can point to a resource ...
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Resources for periodical economics feed [duplicate]

I'm learning economics and I want to read/hear the world through the lenses of any economist. What are the best periodical economics news feeds? It could Magazines such as theeconomist.com Podcast ...
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Consequences of a positive uncovered interest rate parity (UIP) spread for an emerging market economy

Empirically we observe that the uncovered interest rate parity (UIP) does not hold; in fact the exchange rate adjusted return on an emerging market bond is higher than the return on US bonds; I know ...
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Approximate factor model: Weakly correlated and eigenvalue

To my best knowledge, in Ross's APT, it is assumed that the pricing model is the exact factor model. Chamberlain (1983 ECTA) expanded it into the approximate factor model. In the exact factor ...
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Variance of a rational forecast

In Chapter 24 of Richard Thaler's book Misbehaving, he writes: An important property of rational forecasts---as a stock price is supposed to be---is that the predictions cannot vary more than the ...
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Hotelling rule and the shadow prices in a peg

Hotelling rule states that at equilibrium $$\frac{\dot p(t)}{p(t)} = i$$ Meaning that rate of change of the price at time $t$ should be equal to $i$, the interest rate. Assume that the government ...
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When is the pegged price equal to the market price

Suppose the government pegs an exhaustible resource, at a price $P^*$. I found out that the shadow price (initial price of the resource if government didn't peg) would be $$Q_t = ( \sigma i S_t )^\...
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Monthly savings plans

Monthly savings plans in stocks or funds are typical investments for many people. On aggregate, these plans generate a large demand on the underlying assets, often around the end/beginning of a month. ...
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Difference between Negotiable Instrument and Financial Asset

So here are the two pages I was reading to try and understand : Negotiable Instrument and Financial Asset Confusion started as both pages use Certificates of Deposits(CDs) as an example.So a CD is ...