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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Financial Economics and Corporate Finance
In pg 4 of Principles of Corporate finance (Allen et al, 2017), in the context of explaining financing decisions are less important that investment decisions, there is a line that says:
"Financial ...
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10 views
Prior to the 1996 Basel Accords, how did banks measure market risk?
Basel Accord amendment was brought into effect in 1998.
One of the features were:
Allows banks to use proprietary in-house models for measuring market risks
How were market risks measured before ...
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10 views
Loanable funds theory and the “Birth” of a risk premium
Im taking about the loanable funds theory and I am having trouble with this question:
Give two examples of the loanable funds theory to explain the “birth ” of a risk premium for bonds of the same ...
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1answer
22 views
What is the Relationship between expected return and risk of corporate bonds?
So from my past studies i know that if the interest rate is expected to decrease, then the expected return will increase and the demand for long term bonds shifts to the right.
If investors believe ...
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1answer
33 views
Two firms competing ala Cournot
So I´m a bit stuck on this one. There are two firms in the country that sell cars. Both sell Toyotas and they buy their cars directly from the manufacturer, which is Toyota. We can assume that ...
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13 views
Quarterly frequency version of the Fama-French factor models?
All Fama-French (and other) factor models are based on an annual frequency of financial reporting and portfolio holding periods.
Is there any research on quarterly factor models in the context of ...
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50 views
Mean Variance Optimization in a Utility Maximization Framework
I'm struggling to gain a broad understanding of Mean-Variance utility theory as it relates to finding the efficient frontier of a group of assets which each have some return and variance.
The typical ...
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8 views
What are the factors on which value of all resources ( good, silver, cash land etc. ) found in world changes over time?
And followed by, Does it right to say that, if any country become rich then other must become poor and vice-versa. If no, then Is it possible that, in certain conditions, all Nation in the world can ...
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Yang's Impact on Algorithmic Trading?
Presidential candidate Andrew Yang has published the following policy proposals on his website:
1.
FINANCIAL TRANSACTION TAX
Financial markets have grown dramatically
over the past decades. ...
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10 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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13 views
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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40 views
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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10 views
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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1answer
30 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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16 views
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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5 views
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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12 views
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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1answer
17 views
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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2answers
54 views
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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7 views
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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1answer
34 views
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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11 views
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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10 views
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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86 views
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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19 views
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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1answer
24 views
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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1answer
17 views
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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1answer
19 views
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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26 views
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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1answer
297 views
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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42 views
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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1answer
114 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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3answers
87 views
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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47 views
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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1answer
48 views
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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1answer
24 views
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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2answers
77 views
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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107 views
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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1answer
77 views
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 $...
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1answer
31 views
Compound interest ($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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1answer
23 views
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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2answers
41 views
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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2answers
25 views
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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2answers
75 views
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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1answer
49 views
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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1answer
16 views
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?
