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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7 views

Arbitrage checking (one step price tree)

I have a questions on arbitrage. These questions are from my lecture notes. And I don’t understand their some points. Ex1: there is a single step market as follows here, there are two securities ...
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26 views

What does it mean for a firm to have a 0.95% dividend?

Here's an Apple's dividend: What does this 0.95% mean? Is it 0.95% of share capital? If not, what does it mean?
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Is there a relationship between stock market hedge fund leveraging and the repo market?

Lately there have been many articles attempting to link repo-market borrowing with equity market increases. 1 I can see a link if the hedge fund is buying treasuries or mbs and financing it by using ...
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24 views

What is implied by “No arbitrage” in this example?

Suppose that we are in one period model, where assets are bought (in positive and/or negative values) at $t=0$ and are redeemed for their value at time $t=1$. Furthermore, suppose that there are three ...
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69 views

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 ...
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21 views

Value relevance, informative information, Financial statements, IFRS 9

What are the theories that say that the disclosures in the annexes of the report and accounts are less relevant than the figures in the financial statements, is there anything? I've been looking for ...
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14 views

How to calculate bond price and the relationship between bond price and repo rate?

Suppose that there is a gilt Tr 7.5pc '06 in 2006 with interest yield 7,32% and redemption yield 4.31%. How can I compute the price of this gilt per 100 face value. The problem is that the numbers I ...
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What is the economic meaning of multiple internal rates of return?

Recall that the internal rate of return (IRR) is the discount rate such that the net present value (NPV) of a project is 0. One interesting complexity of the internal rate of return (IRR) is that it ...
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1answer
160 views

Utility theory and portfolio optimization: utility of what exactly?

In finance, a common problem is selection of an optimal portfolio given some constraints (e.g. budget constraint and perhaps nonnegative allocation constraint). One can define the optimization problem ...
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29 views

Inforamtion asymmetry modeling

Is there any cook book, in finance, for models in information asymmetry, so as to make some practice?
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26 views

How do you calculate the intrinsic value or fair value of real estate?

How do you calculate the intrinsic value or fair value of real estate? I mean how do you determine that the house/commercial estate is undervalued or overvalued?
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Country specific economic recession/financial crisis data?

Many financial crises are at the global level, yet some of them can be country-specific, especially the ones connected with political instability. For example, the 1990 recession of Russia, the 1958 ...
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1answer
26 views

Economic Profit and the Return on Invested Capital

In my finance classes, I always learned that the a firm earning an "economic profit" is one for which its return on invested capital (ROIC) is greater than it's opportunity cost of capital (usually ...
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28 views

Correlation between nominal bond returns and growth

I read the following passage and the bolded section has me confused: In theory, assets earn a low (or negative) risk premium if they tend to perform well when the economy is weak. When growth ...
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1answer
26 views

Does a private company that is 100% financed by a bank loan have a WACC equal to the interest rate?

When estimating a company's Cost of Debt for a Weighted Average Cost of Capital (WACC) calculation we normally look into its bond yield. But for a private company with 100% debt capital structure, ...
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16 views

How to integrate technology lifetime in NPV

I want to calculate and compare the NPV for different ways of producing a good X. The NPV should be calculated for 30 years. The following technologies can be used for production: Technology A, which ...
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34 views

Examples of textbook definitions of transaction costs, for a non-econ student

I'm not an econ major, neither am I taking it as a minor, however seemingly out of nowhere economics has jumped into my CS class when talking about the role of IT in reducing transaction costs of ...
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1answer
27 views

Negative correlation conditional variance and return

I've estimated a GARCH for S&P 500, Nikkei and DAX index. The model for the return of S&P 500, the results indicate the return of DAX has an negative effect on the S&P 500 conditional ...
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38 views

What is 'repo' in banking

I keep hearing about repo rate etc. But this question is not what is the repo rate. It is: What is a definition of 'repo' ?
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1answer
18 views

Papers on the rate of returns for government-run pension plans

I'm looking for papers studying the implied rate of return for various government pension programs around the world. Both historical and expected returns. Or any study that looks at the taxes for the ...
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446 views

Example of Law of One Price holds but No Arbitrage Fails

I have been told that no arbitrage is a stronger assumption than than the law of one price. In particular, Law of One Price is equivalent to the existence of a stochastic discount factor, whereas no ...
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22 views

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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28 views

How do treasury bill auction work?

So i am having a couple of issues understanding the auctions of treasury bills. I know that the treausury accepts the bids offering the highest price. The treausury accepts the competitive bids in ...
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21 views

Please help to create an interest rate swap

I'm trying to solve Hull's 7.2 problem for swaps. The problem says that: Well, my question is why Company X would need to make a swap contract if it has a good 9.6% interest rate in dollars (and it ...
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1answer
25 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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Is it just as profitable for a brokerage to service investments in 401k plans as opposed IRAs?

Why would a brokerage charge fees to the employer, if they could just charge fees to the individual, like they would do otherwise? If an employer wouldn't want to spend any extra money on 401k plans, ...
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GARCH data modeling

I am analyzing three time series returns for stocks, bonds and real estate, and have done prelimanary tests including Engle's ARCH test which came back as not rejecting the null hypothesis. IF there ...
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1answer
37 views

Data analysis with GARCH modeling

I'm currently analyzing the relationship between stock, bonds, and real estate returns in Germany. I've gathered my data and am planning on estimating this equation: $\sigma_t = \beta_0 + \beta_1 R_{...
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8 views

Acquiring a company :: How to treat working capital

I would like to know if you can help me in a valuation that I am currently working on. Problem framework: -I am valuating company A, which will acquire 100% company B with a 8x ebitda multiple (10M);...
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19 views

Why people set expectations for economic data beforehand?

For lots of economy/finance-related data, usually there is an expectation, and then people will compare the real data (when coming out) with the expectation, to see if it beats or misses the ...
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1answer
105 views

Why is the cash in circulation on the rise in rich countries?

The amount of cash in circulation is on the rise in rich countries (US, EU, etc; except the cashless economy, Sweden). In the digital era, isn't this phenomenon contradictional? For example, here's ...
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80 views

Fixes of quadratic utility when probability of decreasing utility is large

In finance and specifically portfolio theory, a popular utility function is quadratic utility $$ u(x)=x-\frac{\lambda}{2}(x-\mu_x)^2 $$ where $x$ is wealth and $\lambda$ is the parameter of risk ...
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28 views

Forecasting Volatility through GARCH and EGARCH models

I am at a final stage of my dissertation but I am a bit confused. I am trying to forecast volatility by using returns through GARCH(1,1) and EGARCH(1,1) models. I use daily prices of indexes to ...
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40 views

What is the difference between conditional and unconditional risk premia?

This is an asset pricing question. What is the difference between conditional and unconditional risk premia? Here's the context: The fact that carry trade strategies typically earn positive average ...
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23 views

Term for a policy that focuses on minimizing risk

What is the correct economics term for a policy that is focused on containing the spread of risks in the financial sector? I was thinking: risk-targeted policy?
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82 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. ...
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1answer
36 views

What happens when a subsidiary distributes its shares to its parent company?

After a subsidiary company spins off from its parent and becomes public, what happens when the subsidiary distributes its shares to the parent firm's shareholders at some later time? What I'm ...
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6 views

In simple terms, what does the bank liquid reserves to bank assets ratio indicate in terms of world development?

From this website: https://www.indexmundi.com/facts/indicators/FD.RES.LIQU.AS.ZS I am very new to economics/finance and I would appreciate an easier-to-understand explanation of this term
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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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13 views

Calculating weighted average of operating margin (ROS) in benchmarking analysis

I'm looking for the formula for calculating the weighted average of operation margin data. From all the sources I've found so far it calculated as following: the sum of all EBIT data divided by the ...
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25 views

Fama's Definition of Market Efficiency

I'm reading Fama's Nobel lecture "Two Pillars in Asset Pricing" and I'm a little confused by his mathematical definition of market efficiency. Here it is below: Suppose time is discrete, and $P_{t+...
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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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19 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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37 views

Cross-sectional t test & standard deviation

I've got a question regarding the cross-sectional t-test when determining the significance of CAAR in an event study with a sample of 538 transactions. When calculating the standard deviation of CAAR ...
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2answers
33 views

Is it the most efficient to allow free transactions in financial markets?

Most beginner level economics books include explanations why it is most effecient most of the time to allow free trade in the market of goods and services. (e.g. the theory of comparative advantage) ...
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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
37 views

How would one take advantage of this arbitrage opportunity?

I have a quick question about how arbitrage works. Let's say that there are two investments: Invest in a two-year zero Invest in a one-year zero and then reinvest into a forward contract from year ...
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1answer
35 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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1answer
38 views

How to calculate capital investment?

So i have this question: After spending 3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of 6 million. This ...
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Relation between variation of the drift and insurance fee?

what is the relation between insurance fee and the variation of the drift of the underlying asset? I've created a simulation code, and changing those two values does not change the result. As I assume ...

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