Lecture Details :
Financial Theory (ECON 251)
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. Under this hypothesis the best predictor of a firm's valuation in the future is its stock price today. In one famous test of this hypothesis, it was found that detailed weather forecasts could not be used to improve on contemporaneous orange prices as a predictor of future orange prices, but that orange prices could improve contemporaneous weather forecasts. Under the rational expectations hypothesis you can infer more about the odds of corporate or sovereign bonds defaulting by looking at their prices than by reading about the financial condition of their issuers.
On the other hand, when discount rates rather than payoffs are uncertain, today's one year rate grossly overestimates the long run annualized rate. If today's one year interest rate is 4%, and if the one year interest rate follows a geometric random walk, then the value today of one dollar in T years is described in the long run by the hyperbolic function 1/ √T, which is much larger than the exponential function 1/(1.04)T, no matter what the constant K. Hyperbolic discounting is the term used to describe the tendency of animals and humans to value the distant future much more than would be implied by (exponentially) discounting at a constant rate such as 4%. Hyperbolic discounting can justify expenses taken today to improve the environment in 500 years that could not be justified under exponential discounting.
Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses
This course was recorded in Fall 2009.
Course Description :
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.
Other Resources :
Other Economics Courses
- Introductory Game Theory by University of Canterbury
- Econ 2450A Public Economics by Harvard
- Introduction to Economics,Fall 2011 by UC Berkeley
- The Federal Reserve and the Financial Crisis by University of Washington
- Intermediate Macroeconomic Theory by UC Berkeley
- Introductory Game Theory 2007 by University of Canterbury
- History of Economic Thought by University of Oregon
- Behavioral Finance by Other
- International Trade,Fall 2010 by UC Berkeley
- Environmental Economics and Policy,Fall 2011 by UC Berkeley
» check out the complete list of Economics lectures