Yale, , Prof. John Geanakoplos
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Updated On 02 Feb, 19
Why Finance? - Utilities, Endowments, and Equilibrium - Computing Equilibrium - Efficiency, Assets, and Time - Present Value Prices and the Real Rate of Interest - Irving Fisher's Impatience Theory of Interest - Shakespeare's Merchant of Venice and Collateral, Present Value and the Vocabulary of Finance - How a Long-Lived Institution Figures an Annual Budget. Yield - Yield Curve Arbitrage - Dynamic Present Value - Social Security - Overlapping Generations Models of the Economy - Demography and Asset Pricing: Will the Stock Market Decline when the Baby Boomers Retire? - Quantifying Uncertainty and Risk - Uncertainty and the Rational Expectations Hypothesis - Backward Induction and Optimal Stopping Times - Callable Bonds and the Mortgage Prepayment Option - Modeling Mortgage Prepayments and Valuing Mortgages - History of the Mortgage Market: A Personal Narrative - Dynamic Hedging - Dynamic Hedging and Average Life - Risk Aversion and the Capital Asset Pricing Theorem - The Mutual Fund Theorem and Covariance Pricing Theorems - Risk, Return, and Social Security - The Leverage Cycle and the Subprime Mortgage Crisis - The Leverage Cycle and Crashes
4.1 ( 11 )
Financial Theory (ECON 251)
In order for Social Security to work, people have to believe theres some possibility that the world will last forever, so that each old generation will have a young generation to support it. The overlapping generations model, invented by Allais and Samuelson but here augmented with land, represents such a situation. Financial equilibrium can again be reduced to general equilibrium. At first glance it would seem that the model requires a solution of an infinite number of supply equals demand equations, one for each time period. But by assuming stationarity, the whole analysis can be reduced to one equation. In this mathematical framework we reach an even more precise and subtle understanding of Social Security and the real rate of interest. We find that Social Security likely increases the real rate of interest. The presence of land, an infinitely lived asset that pays a perpetual dividend, forces the real rate of interest to be positive, exposing the flaw in Samuelsons contention that Social Security is a giant, yet beneficial, Ponzi scheme where each generation can win by perpetually deferring a growing cost.
Complete course materials are available at the Open Yale Courses website httpopen.yale.educourses
This course was recorded in Fall 2009.
Sep 12, 2018
Excellent course helped me understand topic that i couldn't while attendinfg my college.
March 29, 2019
Great course. Thank you very much.