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The Economics of Financial Markets - Hendrik S. Houthakker

The Economics of Financial Markets

Hardcover

Published: 19th July 1996
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The Economics of Financial Markets puts economics to work on the daily problems faced by investors, traders, speculators and brokers as they wrestle with increasingly diverse and complex financial markets. Drawing on data direct from the financial behavior of households, corporations, and governments, the authors show how accessible but rigorous economics can help in making sense of the financial markets (including those in equities, bonds, mutual funds, options and futures) and of the ways in which these markets are organized.
The Economics of Financial Markets is for those who wish to look behind the daily financial headlines and understand what is driving the prices of bonds, stocks, options, futures and other instruments; how financial markets work; how to identify consistent patterns of market behavior; and how the complex jigsaw of institutions, financial intermediaries, trading places, speculators, hedgers, savers and investors fits together. It operates at that rare intersection of theory and practice where the study of intriguing patterns and phenomena can actually uncover profitable opportunities. The authors don't pretend that they have a secret formula or a sure-fire way to pick future winners in the financial race. The world is littered with the gravestones of "get rich quick" strategies. And there are enough books, both good and bad, on investments and investing. Instead, the authors' task is to make the reader better informed about both the patterns and paradoxes that underlie the twists and turns of financial markets and help turn the jargon of these unique markets from a barrier into a tool.

"This well-written book, while important to library collections, will probably best be used as supplemental readings for most courses in finance or financial economics....As the subject penetrates further into the liberal arts colleges, the Houthakker/Williamson approach may be more widely used. An excellent supplemental work for upper-division undergraduates and graduates."--Choice "The Economics of Financial Markets is an outstanding book about financial markets....[IT] deserves to be a standard reference. It is an excellent choice for economists who would like to become acquainted with the economics of financial markets or for practitioners who want an overview of financial markets. Based on Houthakker's lectures in an elective, undergraduate course at Harvard for economics majors, it also would be useful in a Master's level course and in a course with birght, diligent undergraduates."--Journal of Economic Literature "This well-written book, while important to library collections, will probably best be used as supplemental readings for most courses in finance or financial economics....As the subject penetrates further into the liberal arts colleges, the Houthakker/Williamson approach may be more widely used. An excellent supplemental work for upper-division undergraduates and graduates."--Choice "The Economics of Financial Markets is an outstanding book about financial markets....[IT] deserves to be a standard reference. It is an excellent choice for economists who would like to become acquainted with the economics of financial markets or for practitioners who want an overview of financial markets. Based on Houthakker's lectures in an elective, undergraduate course at Harvard for economics majors, it also would be useful in a Master's level course and in a course with birght, diligent undergraduates."--Journal of Economic Literature

Introductionp. 3
What This Book Is Aboutp. 3
Financial Markets and Financial Instruments Definedp. 7
Basic Concepts of Accountingp. 9
The Balance Sheetp. 10
The Cash Flow Statementp. 12
The Income Statementp. 14
Sources of Informationp. 15
The Place of Financial Markets in the Economyp. 16
Real Assets and Financial Claimsp. 16
Balance Sheets for the U.S. Economyp. 19
The International Investment Position of the United Statesp. 21
The Distribution of Financial Assetsp. 22
A Framework for Macroeconomic Analysis of Flowsp. 23
The National Accountsp. 24
The Flow of Funds Accountsp. 28
The Relation between Stocks and Flowsp. 30
International Transactionsp. 31
Exchange Ratesp. 32
The Rate of Interestp. 35
The Rate of Interest in a Barter Economyp. 35
Government Borrowingp. 36
Introducing Money: Nominal and Real Interest Ratesp. 37
Monetary and Fiscal Policyp. 40
The Supply of Moneyp. 40
The Demand for Moneyp. 43
The Objectives of Monetary Policyp. 45
Fiscal Policy and the Government Budgetp. 46
The Supply of Securitiesp. 48
General Characteristics of Securitiesp. 49
The Supply of Government Securitiesp. 49
Federal Government Obligationsp. 50
Municipal Bondsp. 52
Bonds of Foreign Governments and International Organizationsp. 53
Index-Linked Bondsp. 53
Corporate Financial Policyp. 54
Empirical Evidencep. 59
The Supply of Corporate Securitiesp. 61
Corporate Equitiesp. 62
Corporate Takeoversp. 67
Corporate Bondsp. 67
Junk Bondsp. 68
Convertible Securitiesp. 69
Partnership Units and Business Taxationp. 70
Mutual Fund Sharesp. 71
Money Market Fundsp. 74
Mortgages and Mortgage-Backed Securitiesp. 74
Claims on Financial Institutionsp. 75
The Demand for Securitiesp. 78
The Time Dimensionp. 79
A Case in Microeconomics: Saving for Retirementp. 79
Present Value and Durationp. 81
The Calculation of Yields on Zero-Coupon Bondsp. 87
The Term Structure of Interest Ratesp. 88
The Risk Dimensionp. 90
The Measurement of Riskp. 90
Bivariate Distributionsp. 93
Expected Utilityp. 95
Estimating the Mean and Variance of Returnsp. 103
Conditional Probabilities and Expected Valuesp. 104
The Portfolio Complicationp. 105
Securities Markets and Their Efficiencyp. 110
Central Trading Placesp. 111
Stock Exchangesp. 111
Types of Orders and Their Executionp. 116
Specialists and Market Clearingp. 118
Financial Markets without Central Trading Placesp. 122
The Over-the-Counter Stock Marketp. 123
Stock Exchanges in Other Countriesp. 125
The International Stock Exchange in Londonp. 126
The Tokyo Stock Exchangep. 129
Operational Efficiency and the Efficient Market Hypothesisp. 130
The Weak Form of the EMH, and Technical Analysisp. 132
Do Equity Prices Follow a Random Walk?p. 135
The Semistrong Form of the EMH, and Security Analysisp. 137
How Rapidly Do Prices Adjust to News?p. 138
The Strong Form of the EMHp. 139
Conclusions on Informational Efficiencyp. 140
The Determination of Equity Pricesp. 141
Shares as Claims to Future Dividendsp. 142
Steady Growth in the Dividendp. 142
Aggregate Dividends, Earnings, and Inflationp. 145
Shares as Claims to Corporate Net Worthp. 146
The Capital Asset Pricing Modelp. 150
The Simplest Form of CAPMp. 151
Extending the CAPMp. 156
Estimating Betasp. 158
Implications for Portfolio Managementp. 159
The Validity of CAPMp. 162
Arbitrage Pricing Theory: An Alternative Approachp. 162
Appendix: Stock Indexesp. 164
The Three Main Indexesp. 164
Some Other Stock Indexesp. 167
Security Analysisp. 168
Security Analysis and Market Efficiencyp. 168
A Modern View of Security Analysisp. 169
Macroeconomic Developments and Changes in Regimep. 170
Industry Growthp. 171
International and Regional Growthp. 175
Industry Structurep. 177
Firm-Specific Factorsp. 180
The Role of Financial Statement Analysisp. 182
The Adjustment Process of Financial Ratiosp. 186
Pro-Forma Income and Cash Flowp. 188
Caterpillar Inc.: A Security Analysis and Valuation Examplep. 191
Shortcuts in Security Valuationp. 195
Uses and Pitfalls of Price/Earnings Ratiosp. 196
Tobin's q as an Alternative Approach to Securities Valuationp. 198
Options and Options Pricingp. 201
The Basics of Stock Optionsp. 202
Institutional Aspects: Exchange-Traded Stock Optionsp. 202
The Payoff from Buying and Selling Optionsp. 205
Combinations of Optionsp. 207
Combining Options with Stocksp. 209
The Put-Call Parity Theoremp. 211
The Valuation of Stock Optionsp. 213
The Expected Payoff of a European Callp. 215
Application of the Capital Assets Pricing Model to Optionsp. 216
The Black-Scholes Formula for a European Callp. 217
Alternative Derivations of the Black-Scholes Formulap. 220
Other Option Modelsp. 222
Some Extensions of the European Call Formulap. 223
The Empirical Relevance of the Black-Scholes Formulap. 226
Options and Portfolio Managementp. 226
Convertible Bonds and Stocks as Optionsp. 227
Other Types of Optionsp. 229
Futures Contracts and Futures Marketsp. 230
Forward Contractsp. 231
The Origins of Futures Tradingp. 232
Basic Elements of Futures Contractsp. 234
Delivery and Cash Settlementp. 235
Futures and Optionsp. 238
The Organization of Futures Marketsp. 240
Categories of Tradersp. 242
Types of Commodities and Financial Instruments Tradedp. 244
Volume and Open Interestp. 246
Appendix: The Euromarkets and the Swap Marketp. 251
Innovations in Euromarket Instrumentsp. 252
The Swap Marketp. 253
Futures Pricesp. 255
Profits and Losses on Various Transactionsp. 256
Implied Limits on Simultaneous Price Differencesp. 257
Relations among Spot and Futures Pricesp. 258
Financial Futuresp. 258
Nonseasonal Commoditiesp. 263
Seasonal Commoditiesp. 265
Hedgers, Speculators, and Market Equilibriump. 268
A Portfolio Analysis of Hedgingp. 269
Hedging Effectivenessp. 271
Market Equilibriump. 272
The Role of Expectationsp. 273
Futures Prices as Predictors of Spot Pricesp. 274
Expectations versus Spot-Market Constraintsp. 274
Samuelson's Conjecture on Increasing Volatilityp. 276
Futures and Portfolio Managementp. 278
Program Tradingp. 278
Portfolio Insurance: A Post-mortemp. 279
Futures Contracts as an Investmentp. 280
Regulation of Financial Marketsp. 283
The Ethics of Finance and the Economic Function of Financial Marketsp. 283
The Purposes of Regulationp. 285
Maintaining Competitionp. 285
Preventing Fraud and Providing Informationp. 286
Levels of Regulationp. 287
Federal Regulation of Trading in Corporate Securitiesp. 288
Reporting of Financial Results and Other Developmentsp. 288
New Issuesp. 289
Insider Tradingp. 290
Federal Regulation of Futures Marketsp. 290
A Case Study: The Silver Manipulation of 1979-1980p. 292
The Silver Marketp. 292
The Manipulationp. 293
The End of the Manipulationp. 295
The Other Side of the Storyp. 296
The Aftermathp. 297
Regulatory Aspectsp. 297
Regulation in the United Kingdomp. 299
Notesp. 303
Bibliographyp. 335
Author Indexp. 349
Subject Indexp. 351
Table of Contents provided by Syndetics. All Rights Reserved.

ISBN: 9780195044072
ISBN-10: 019504407X
Audience: Professional
Format: Hardcover
Language: English
Number Of Pages: 374
Published: 19th July 1996
Publisher: Oxford University Press
Country of Publication: GB
Dimensions (cm): 24.1 x 16.3  x 3.0
Weight (kg): 0.66