Financial Theory - Audio
By John Geanakoplos
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This course attempts to explain the role and the importance of the financial system in the global economy. Rather than separating off the financial world from the rest of the economy, financial equilibrium is studied as an extension of economic equilibrium. The course also gives a picture of the kind of thinking and analysis done by hedge funds.
||01 - Why Finance?||This lecture gives a brief history of the young field of financial theory, which began in business schools quite separate from economics, and of my growing interest in the field and in Wall Street.||3/25/2011||Free||View in iTunes|
||02 - Utilities, Endowments, and Equilibrium||This lecture explains what an economic model is, and why it allows for counterfactual reasoning and often yields paradoxical conclusions.||3/25/2011||Free||View in iTunes|
||03 - Computing Equilibrium||Our understanding of the economy will be more tangible and vivid if we can in principle explain all the economic decisions of every agent in the economy.||3/25/2011||Free||View in iTunes|
||04 - Efficiency, Assets, and Time||Over time, economists' justifications for why free markets are a good thing have changed.||3/25/2011||Free||View in iTunes|
||05 - Present Value Prices and the Real Rate of Interest||Philosophers and theologians have railed against interest for thousands of years.||3/25/2011||Free||View in iTunes|
||06 - Irving Fisher's Impatience Theory of Interest||Building on the general equilibrium setup solved in the last week, this lecture looks in depth at the relationships between productivity, patience, prices, allocations, and nominal and real interest rates.||3/25/2011||Free||View in iTunes|
||07 - Shakespeare's Merchant of Venice, Collateral. Present Value and the Vocabulary of Finance||While economists didn't have a good theory of interest until Irving Fisher came along, and didn't understand the role of collateral until even later, Shakespeare understood many of these things hundreds of years earlier.||3/25/2011||Free||View in iTunes|
||08 - How a Long-Lived Institution Figures an Annual Budget. Yield||In the 1990s, Yale discovered that it was faced with a deferred maintenance problem: the university hadn't properly planned for important renovations in many buildings.||3/25/2011||Free||View in iTunes|
||09 - Yield Curve Arbitrage||Where can you find the market rates of interest (or equivalently the zero coupon bond prices) for every maturity?||3/25/2011||Free||View in iTunes|
||10 - Dynamic Present Value||In this lecture we move from present values to dynamic present values.||3/25/2011||Free||View in iTunes|
||11 - Social Security||This lecture continues the analysis of Social Security started at the end of the last class.||3/25/2011||Free||View in iTunes|
||12 - Overlapping Generations Models of the Economy||In order for Social Security to work, people have to believe there's some possibility that the world will last forever, so that each old generation will have a young generation to support it.||3/25/2011||Free||View in iTunes|
||13 - Demography and Asset Pricing: Will the Stock Market Decline when the Baby Boomers Retire?||In this lecture, we use the overlapping generations model from the previous class to see, mathematically, how demographic changes can influence interest rates and asset prices.||3/25/2011||Free||View in iTunes|
||14 - Quantifying Uncertainty and Risk||Until now, the models we've used in this course have focused on the case where everyone can perfectly forecast future economic conditions.||3/25/2011||Free||View in iTunes|
||15 - Uncertainty and the Rational Expectations Hypothesis||According to the rational expectations hypothesis, traders know the probabilities of future events, and value uncertain future payoffs by discounting their expected value at the riskless rate of interest.||3/28/2011||Free||View in iTunes|
||16 - Backward Induction and Optimal Stopping Times||The main part of the lecture focuses on the powerful tool of backward induction, once used in the early 1900s by the mathematician Zermelo to prove the existence of an optimal strategy in chess.||3/28/2011||Free||View in iTunes|
||17 - Callable Bonds and the Mortgage Prepayment Option||This lecture is about optimal exercise strategies for callable bonds, which are bonds bundled with an option that allows the borrower to pay back the loan early, if she chooses.||3/28/2011||Free||View in iTunes|
||18 - Modeling Mortgage Prepayments and Valuing Mortgages||A mortgage involves making a promise, backing it with collateral, and defining a way to dissolve the promise at prearranged terms in case you want to end it by prepaying.||3/28/2011||Free||View in iTunes|
||19 - History of the Mortgage Market: A Personal Narrative||I explain how, as a mathematical economist, I became interested in the practical world of mortgage securities, and how I became the Head of Fixed Income Securities at Kidder Peabody, and then one of six founding partners of Ellington Capital Management.||3/28/2011||Free||View in iTunes|
||20 - Dynamic Hedging||Suppose you have a perfect model of contingent mortgage prepayments, like the one built in the previous lecture.||3/28/2011||Free||View in iTunes|
||21 - Dynamic Hedging and Average Life||This lecture reviews the intuition from the previous class, where the idea of dynamic hedging was introduced.||3/28/2011||Free||View in iTunes|
||22 - Risk Aversion and the Capital Asset Pricing Theorem||Until now we have ignored risk aversion. The Bernoulli brothers were the first to suggest a tractable way of representing risk aversion.||3/28/2011||Free||View in iTunes|
||23 - The Mutual Fund Theorem and Covariance Pricing Theorems||This lecture continues the analysis of the Capital Asset Pricing Model, building up to two key results.||3/28/2011||Free||View in iTunes|
||24 - Risk, Return, and Social Security||This lecture addresses some final points about the CAPM.||3/28/2011||Free||View in iTunes|
||25 - The Leverage Cycle and the Subprime Mortgage Crisis||Standard financial theory left us woefully unprepared for the financial crisis of 2007-09.||3/28/2011||Free||View in iTunes|
||26 - The Leverage Cycle and Crashes||In order to understand the precise predictions of the Leverage Cycle theory, in this last class we explicitly solve two mathematical examples of leverage cycles.||3/28/2011||Free||View in iTunes|
It's supposed to sound like Psych
For too long economics and finance theory has been captive to the views of rational buying decisions and the efficient market hypotheses.
But we all know that economics is not all about rational decision making. And financial decisions are not merely rational decisions where everybody has the same information and makes the "best" (I.e., most rational) decision.
Economics and finance are driven by psychological factors including fear, greed, advertising manipulation, and marketing ploys. Finance is about psychology. That's what Behavioral Finance & Behavioral Economics are all about.
An interesting concept
It really does make a lot of sense. But it feels more like listening to a psychology lecture.