Questions tagged [financial-economics]

A branch of economics focusing on monetary activities, in which money of one type or another is likely to appear on both sides of a trade

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27 views

Understanding Mortgaged Backed Security during financial crisis

This is my understanding of the mortgage backed security.Banks will give loans to customers, and then they decide to sell the loans to investment banks and charge a fee with it to earn profit. Now the ...
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Can we 'predict' the delta of a stock? The delta of a stock is $\pm 1$ right?

A stock is like a living organism. A sparrow, say. And we are able to create an emergent-based abstraction of that sparrow, which closely approximates the sparrow itself, accounting for migration ...
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Explain the statement: “Due to international capital mobility, S and I should not move together.”

I read this statement in ADB's e-course on financial globalisation. I have basic knowledge of the economics, but nothing too advanced. So, what I understood is that since in there is much greater ...
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Rationalising today's bond market and stock market

As of this writing, the 10-year T note yields 1.437%, on a steady 3-month downward trend (from 1.55-1.75% in recent months) while the S&P 500 is nearing all-time-highs. When these long-term bond ...
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Disconnect between real and financial economies [duplicate]

I've been reading a lot of articles on how there is a disconnect between how the real economy is currently doing (like falling GDP and high unemployment rates) and how the stock market is doing (...
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32 views

How do I calculate the price and risk of a senior tranche?

Say I grant two risky X years loans P(default)=0.1 of 1000 USD. For simplicity let us assume that the interest rate is 0. I want to sell a X years Senior tranche of 1000 USD and a Junior tranche of ...
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Was underestimation of the risk of Senior tranches partially responsible for the 2007-2008 subprime crisis?

I am trying to understand this explanation by Professor of Finance Andrew Lo of the 2007-2008 subprime crisis: Say we have two risky loans, P(default)=0.1 of USD 1000: SP1 and SP2. An intermediate ...
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Are these two different cases when it comes to Forex Reserves?

In a forex reserve, what is the difference between "Buying US Dollars to pile up reserves" and "Using FPIs, remittances or exports to build up reserves" ? How differently do they ...
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44 views

How to handle the missing values' issue of newly listed stocks?

I am trying to test some asset pricing models on 10 portfolios for the period of 2010-2020. The problem is that three of these portfolios included stocks that are newly listed in 2017 and 2018, so I ...
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Quote or price driven markets

Where can I find some details about quote driven markets? Can anybody show any notes or provide some paradigm about what the trader sees when he is about to trade in such a market? They say that he/...
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Maximum of conditional expectation

I have a statistics question for the insider problem in the Kyle (1985) model: How does one go from $\max\limits_{X} E[(v-\bar{v}-\lambda(X+u))X|v]$ to $\max\limits_{X} (v-\bar{v}-\lambda X)X$ ?
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risk aversion and convexity of indifference curve

This is a question from the CFA exam. With respect to utility theory, the most risk-averse investor will have an indifference curve with : (a) greatest slope coefficient (b) most convexity The answer ...
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Relationship between stock market and exchange rate

I am looking for some references on the relationship between the stock market and the exchange rate, both from the empirical and theorical side. Is there any theory which suggests a relationship ...
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36 views

Econometric analysis of mergers from a company's point of view

I am learning about financial analysis of mergers and acquisitions: most of the models are based on accounting principles and simple assumptions. I wanted to delve deeper into more statistical/ ...
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51 views

Why if the economy will produces too much there will be an increase of prices in nearly all goods and services?

I am taking an online Economics course and not understanding why if the economy will produces too much there will be an increase of prices in nearly all goods and services? If for example there will ...
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43 views

Is there a financial hypertrophy ? Could you make a case for finance?

I've the impression that finance is in hypertrophy. But I'm not an expert on it, so I'd like those who are more knowledgeable than I am to do a [steelman][1] of it. The things that make me thinking ...
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389 views

Is it common to see hedge funds go bankrupt?

Have any hedge funds gone bankrupt as a consequence of the "GameStop scandal"? And more generally is it common to see hedge funds go bankrupt?
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Where can I retrieve a complete history of macro economic data annoucements?

I'd like to get the complete ( well at least the last 20 years) history of economic data announcement calendar firstly for US and secondly for G5 countries. I have found many websites that propose the ...
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How to interpret risk premium

I do not understand the notion risk premium. Let us suppose that John goes to the city by car, but he is thinking about not paying for the parking. If he is caught in the act he must pay the fine. How ...
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49 views

Finance vs. financial economics (terminology)

What is the difference between finance and financial economics? E.g. we have tags for both* and I wonder when to use which, but not only. *And one more on financial markets – see this thread on Meta ...
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57 views

How does explanatory variables in variance affect unconditional variance of GARCH(1,1)

I have a question about the unconditional variance of a GARCH process, where exogenous explanatory variables are included in the variance. The usual GARCH models the variance using: $$\sigma^2_t=\...
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Coefficient omitted due to time fixed effect and multi-collinearity

I am working on a research paper (my first one) where I am dealing with company level unbalanced panel data. There are broadly two types of control variables in the study - a) firm level control ...
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61 views

Elasticity of demand functions

I have some question about the elasticity of the demand functions of two different traders/consumers. Suppose that $x_1$ and $x_2$ are the elasticities of the demand functions of these agents. ...
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Free Sources of Implied Repo Rate Data?

Are there freely available historical data on implied repo rates? In quick review, what's an implied repo rate? In futures markets, the implied repo rate (also commonly called the IRR) is the rate of ...
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Bothersome Mean/Variance Analysis

I'm currently writing my thesis in which I compare a series of ESG General Equilibrium models. I fell over this proof in Pastor, Stambaugh, Taylor Sustainable Investing in Equilibrium (2019) page 42. ...
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How is equilibrium reached in CAPM such that the tangency portfolio = market portfolio?

From my research online, when learning CAPM with $n$ risky assets and a risk free asset with return $r_f$, I always see the conclusion that in equilibrium, the market portfolio = tangency portfolio ...
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Calculation of term structure

I am supposed to calculate term structure of interest rate. I got the table including several bonds with price of the bond, face value and number of years till maturity. I calculated yield of each ...
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118 views

What to include in a unit economics calculation of a car rental business?

I'm doing a unit economics per order calculation on a car rental business and I'm not sure what costs should I include in it. So far I have added CAC, maintenance, labor, car depreciation. Should I ...
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162 views

Are no arbitrage models and equilibrium models equivalent?

This YouTube video from WHU (starting from 3:50) claims that no-arbitrage models (such as Black-Scholes and HJM) are equivalent to equilibrium models (such as CAPM or C-CAPM). He uses the Euler ...
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68 views

Cashflow Risk vs Discount Risk

I'm studying financial economics/asset pricing and I often hear the terms cashflow risk and discount risk but I'm not sure what they mean? The Campbell/Shiller (1988) decomposition includes cashflows (...
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CAPM and beta for individual stocks

Why do we just assume that the β is symmetric for a stock? Could it not very well be the case that the β has a larger leverage (covariance with the market) for example 1.2 in a bear (baisse) market ...
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How is buying gold during a recession helpful for the economy?

As far as I can see it, it is a selfish and fearful reaction to bad market conditions that would result in greater deflationary pressure. It is true that it preserves the owner's wealth, but unless ...
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Volatility and the stock market

In general, it is known that market volatility increases during bear markets while it decreases during bull markets. Why is this the case? It seems strange that volatility is linked to the the general ...
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Calculation of theoretical futures value

we form a stock index by using only two stocks in the index. One of the stocks is the Stock-A. The current selling price of the stock-A is 103 dollars and the second stock is the stock-B. The current ...
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Properties of Financial Markets in Real Life

When studying financial economics, three concepts appear everywhere Equilibria (investors maximise utility, markets clear and aggregated demand equals aggregated supply) Completeness (there are ...
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220 views

How do you read currency exchange rates in terms of domestic and foreign currency?

I am having some issues understanding how to read exchange rates. E is the exchange rate I read online that if we have for example E\$/€, then the base currency in this case is the dollar and the ...
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How reliable is ECB's financial derivatives data?

I am trying to use QSA financial derivatives data retrieved from the ECB's database (this is actually compiled by ECB and Eurostat). To be more specific, the data is: Financial derivatives held as ...
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How does interest rates impact investment

How does a decrease in interest rates decrease investment rates? This is how I believe a liquidity trap works, not sure if it is correct. Thank you
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Financial Economics and International Economics

What is the difference of Financial Economics and International Economics? Why, How? What are the implications of these differences? Will a model of international economics suddenly become a model of ...
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Risk neutral probability for each of 3 states

I need help to find the risk-neutral probability for states 1,2 and 3 I have two stocks: A and B. The price of A today is 180 and in a year it will be worth 288 (S1), 180 (S2) or 120 (S3); The ...
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Clarification on amortization of constant payments

I have found this formula on wikipedia : $$P=C_k(1+i)^ {(n-k+1)}$$ which describe the constant payment that has to be paid every year ($C_k$ is the part of the initial loan that is extinguished with ...
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How can you profit from junk bonds and selling treasuries, if the junk bond doesn't default?

Junk Bond/Treasury convergence Typically junk bonds, given their speculative grade, are undervalued as people avoid them. Therefore the spread over treasuries is more than the risk of default, by ...
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Beginner wanting to learn about economics/finance to explore career options?

I want to explore the banking/financial industries more for potential career options, can you recommend any books/ free online courses and sources in general as a starting point to build on my ...
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275 views

Who invented these key notions in Finance?

We often give credit to the origins of academic achievements. The Black-Scholes equation or the Gibbons Ross Shanken (GRS) test etc. What about Net Present Value (NPV), Internal Rate of Return (IRR),...
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Why's a penny stock basically a call option with a strike price of 0 that doesn't expire?

This Reddit comment proclaims: A penny stock basically IS a call option with a strike price of zero that doesn't expire. I suspect there's a high correlation between penny stock investors and people ...
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Why does Samuelson say common stocks are better than bonds and preferred stocks during inflation?

I’m reading the first edition of Paul Samuelson’s Economics (1948). In Chapter 6, “Business Organization and Income,” after describing bonds, preferred stocks, and common stocks, he writes: To test ...
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Why is buying a put option a cash outflow, but shorting inflow?

What advantage are there to shorting the stock as opposed to buying put option : finance Buying a put is a cash outflow, while shorting is an inflow. One advantage is that you can reinvest this ...
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Is it possible that total virtual money i.e. total money in all bank account around the world can increase the total money produced by mankind? [closed]

I am not an expert of economics so please give advise me if I have committed any mistake. This question striked in my mind a few months ago, I tried to think on this question many times but I wasn't ...
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What is the best observable proxy for the instantaneous risk-free market interest rate?

I am exploring a number of different models using daily data, of the US economy, and am trying to gather up observable proxies for some of the most important macro and micro variables, and surveying ...
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He, Krishnamurthy (2013)

How do you derive equation (10) on page 740 from He, Krishnamurthy (2013 AER)? They say that "Given the log objective function in equation (8), the risky asset household chooses $\alpha_t^h$ to solve ...