ISSUES IN CAPITAL MARKET ECONOMICS
Outline & Readings
Federal Reserve Info:
Federal Reserve System Article Search Engine / FRB of New York / FRB of St. Louis / Index of SEC Rules /
Fama-French Forum/ John Cochrane CGSB Site/ Xavier Gabaix NYU Site/ Streetwise Professor/
Bloomberg / Long Run Historical Stocks, Rates, Gold / Economagic conomic-Financial Data
Dr. Brian Goff
Office Hours for Spring 2013: TTh 9:30-11:30 (appointments & drop-ins welcome other times)
To acquaint students with several current issues on the border between macroeconomics and financial economics, financial market microstructure, and financial market regulation
Selected Readings On-Line
Exam I = 20%
Exam II = 40%
Assignments/Presentations = 40%
Total = 100%
(A=90-100; B= 80-89; C= 70-79; D = 60-69; F < 60)
Weekly Assignments/Presentations: Starting with Class 5; students will make 10 minute powerpoint presentations on a listed topic. These presentations may be done with teams up to 3 members. The powerpoint slides should be printed and turned in. The aim of the presentation is to summarize the material (or the most important parts of it) in ways that best communicate it to the other students using cut/past graphics, data, bullets. Remember, more is not always better. Clear, accurate -- keep those words in mind along with emphasizing connections to background economic ideas (this isn't journalism class, it's econ). You are encouraged to refer to other sources that may enhance your understanding and presentation. There will be 2 graduate teams with more difficult material (some weeks).
Exams: These will be a short answer/multiple choice tests. Exam I will cover basic ideas for macrofinance from weeks 1-3. Exam II will cover your knowledge of the student presentations (and my comments), so make sure to take notes on all of the presentations.
Students with disabilities who require accomodations (academic adjustments and/or auxilary aids or services) for this course must first contact the Office of Student Disability Services in DUC A-200.
COURSE OUTLINE & READINGS (subject to changes)
Note: If a link is dead, please email me as soon as possible. Use Wikipedia, Investopedia, or similar sources to look up terms and concepts
Some articles, if accessed from off-campus, require going through WKU's E-Journal system. Go here http://www.wku.edu/Library/ejrnloff.htm# for instructions
Week 1 (Jan 23) Administration & Basic Ideas in MacroFinance & Market Microstructure I
Ideas, Events, and People in MacroFinance
Key MacroFinance Institutions and Markets: Fed; Treasury; Banks; Shadow Banking/Investment Banking; Stock Markets; Bond Markets; Commodity Markets; Derivative Markets;
Key MacroFinance Indicators: Interest Rates; Spreads; Stock Indexes
Week 2 (Jan 30) Basic Ideas in MacroFinance & Market Microstructure II
Risk Concepts and Measurement Concepts: Risk; Risk Aversion; Probability Distributions; Law of Large Numbers; Market Model
Primer on Valuation of Assets: Present Value; Expected/Option Value; Arbitrage; Modidliani-Miller;
Related Links: Ray Fair Simulation Model Standard deviation (biniomial applet); law of large numbers -- sequence applet; dice applet; coin flipping; The Mismeasurement of Risk
Week 3 (Feb 6) Basic Ideas in MacroFinance and Market Microstructuer III (Tentatively, Meet in Room 530)
Review of Key Concepts
Key Empirical Methods: Descriptive Statistics; Key Transformations; Time Series Regressions; Simple VARs
In class demonstration & student application during class time
Undergrad & Grad: Use Gretl (or other software) to produce descriptive statistics, time series plots, basic regression, and VARs from the following data: Monthly Interest Rates ; Also, practice downloading data using Gretl databases
Tasks: 1. Compute time series plot for same variables; Put title with you name included
2. Compute summary statistics
3. Compute 1-period lag of all variables
4. Compute a regression of 3-month treasury with 1-period lag of itself and fed funds rate
5. Compute two VARs (use default lag settings), one with 3-month treasury, commercial paper, fed funds, and cd rates
one with aaa, baa, and 10-year treasury
6. After VARs are generated, generate impulse response graphs
7. Copy and paste the time series plot, summary stats, regression, and VAR impulse response functions to Word file
-- Make sure to put your name on the top of the first page
-- make sure each section has a title and the output appears neat
-- print the output
(utilize grad students, me, and other classmates for help)
Week 4 (Feb 13) Exam 1 + Intro to Week 5
Week 5 (Feb 20) Influences on Asset Prices
Key Questions: Why do stock prices go up and down in normal periods?
Why is it difficult to connect events with changes in stock values?
Why are stock returns so much higher than bond returns?
Undergrads: Prepare a 10 minute PPT presentation on Cochrane on Efficient Markets Today -- apx. 3-5 slides -- conveying the key points of the reading;
Grad only: students should write a 1-page summary
Grad only: Prepare a 10 minute PPT presentation on Ray Fair "Events that Shook the Market"
Related Links: Shiller Stock Data; Campbell on Long Run Returns; Short and Long Run Stock Return Behavior ; Cochrane Long Run Stock Perspective Stock Market Crashes and Depressions (Barro and Ursua); Stock Price Graphics File; Ray Fair Simulation Model ; Fama Minn Fed Interview (pdf) Fama DFA Interview Shiller Site Macro Finance Puzzles (p. 2-3 only) ; Manne on Market Efficiency or Fama Long Interview or Efficient Capital Markets -- CEE Vox Barro on Disasters and Equity Premium or Fama on Market Efficiency Shiller Stock and P-E Data ; Apple's New Normal
Week 6 (Feb 27) Asset Price Bubbles & Crashes
Key Questions: Why do stock prices (and other assets values) experience booms and crashes?
Are there indicators of increased risk of crashes?
(ALL) Generate a 2-5 slide presentation (10 min or less) on Rational Revolutions (Chicago GSB technical background to article )
(Undergrads only): Find a list of highly valued ".com" companies from 1999/2000. For at least 5 of them, find their total market value (market capitalization) at peak in 99/00 and find their value today (or their value when bought by another company). Also, list at least 5 that vanished without being purchased
(Grad only): There have been 9 periods of > 20% decline in stocks over the past 110 years, all but 2 (1987, 2000) coincide with moderate/severe recession; Use statistics to explore and present evidence (2-5 slides) on what might be a useful indicator of increased risk of such events; Here are some stats to consider: Yield Curve; SP500/GDP; Baa rate - Aaa rate; Price-Earnings Ratio; Baa - 3 mo Treasury;
Related Links: Bubble Regressions; Bubble, Bubble (frb-stl; April 99) & Fama Interview Campbell Bubble in Bond Market? Tulipmania (JSTOR link through WKU)
Week 7 (Mar 6) The Crash of 2008
Key Questions: What factors contributed to the Crash of 2008?
To what extent did real estate price/mortgage debt cause the crash and to what extent did it reflect similar trends in other debt?
How much private sector debt is too much debt?
How much did stock holders of several large financial firms lose and what are the implications for "public policy-moral hazard" explanations of the crash?
All: 4-5 slides (10 min or less) FRB Boston Why So Many Bad Real Estate Decisions?
Grad only: present 3-5 slides on growth of debt from 1980 to 2008 (overall debt and different categories: commercial, household, public ...) considered relative to measures of ability to pay OR losses to large stockholders of large financial firms in 2008 crash
Related Links: Crisis Timeline Goff PPT on Crisis Systemic Risk & Financial Crisis Bubbles or How Unusual Stock Market of 2008 Crisis and Bank Opaqueness
Week 8 (Mar 13) Spring Break
Week 9 (Mar 20) Euro Debt Crisis
Key Questions: Why is there a debt crisis in Europe?
What do sovereign defaults look like?
Why are currency and debt crises usually connected?
Undergrads use 3-5 slides (10 min or less) to summarize FRB Richmond Overview Northern v. Southern Europe
Grad: 1 page summary on reading above + present 3-5 slides (10 min or less) on FRB Richmond Econ of Sovereign Defaults
Related Links: Global Credit Risk ; Cochrane-WSJ Contagion and other Euro Myths Jenkins WSJ - None Dare Call it Default Monetary Challenges Predicting Debt Crises Unpleasant Monetarist Arithmetic (Cochrane)
Week 10 (Mar 27) TBA
Week 11 (April 3) Federal & State Fiscal Problems
Key Questions: What States are facing the biggest fiscal issues?
What fiscal issues does the US federal government face?
If things are so bad, why are U.S. Treasuries so valuable right now?
Undergrads: Using the links below or other data (basic) or other basis, present 2-5 slides (10 min or less) desribing which states are at greatest fiscal risk and why; The Pension Bomb Northwestern Study Pew Center Map Fiscal Health of US States
Additional Resources: Josh Rauh Stanford (Rauh detailed papers) Crisis in Local Govt Pensions Are State Pensions Sustainable
Grads: Present 3-5 slides (10 Minute Presentation) describing the projected fiscal condition of the US over the next 20 years and factors that may make it better or worse. Incorporate some of the analysis of Cochrane into your presentation. Read over the Prescott article and consider why growing debt (to some extent) makes sense with a demographic "shock" like the baby boom CBO Budget Outlook to 2012 Conference on Looming Fiscal Crisis Unpleasant Monetarist Arithmetic (Cochrane)
Needed Quantity of Government Debt (Prescott) Barro on Ricardian Equivalence
Week 12 (Apr 10) Japan's MacroFinance Issues
Key Questions: Why has Japan been in a 20 year economic slump?
Why has Japan been able to carry a large public debt and what is the outlook ahead?
What are the similarities and differences with the situation in Europe and the U.S?
Assignments/Presentations: No presentations.
All: write a 1 page summary of Bass Chicago GSB presentation and a 1 page summary of the Sober Look evidence SoberLook 1 SoberLook2
Additional Resources: Econbrowser on Fiscal Tipping Points Japan US
Week 13 (Apr 17) Various Empirical Explorations
10 Minute Presentation on one of the following
Demographic Shifts and Markets
Key Questions: What impacts will demographic shifts have on asset values?
How accurate are long run demographic predictions?
Data on Demographics and Stock Values: Vox Demographics and Stock Predictability + "Future Shock" + Milken Rebuttal
The Search for Safe Assets
Key Questions: What assets do people seek out when markets are troubled?
What are attributes of these assets that are common and what are different (up/down movements; variance; ...)?
Key Questions: Why did commodity prices boom in 2007 and 2008?
Was speculation in futures markets to blame for the spike in commodities prices?
Search Streetwise Professor and Econbrowser (James Hamilton) for posts between 2008 and 2012
Key Questions: What has been the behavior of gold and silver prices relative to each other and individuall over the past 10 years?
Do gold and silver prices converge around a common trend (cointegrated)?
What is arbitrage and how is it related to the cointegration?
Search out references on forces behind gold and silver prices; Present data on movements of these series (and their ratio and difference); examine the cointegration of these time series (be careful with unit of time);
Key Questions: Did the financial industry grow too large?
What changes to the financial industry might best reduces changes of future bubbles/crashes?
See John Cochrane article as well as WSJ article on Cyprus that I sent by Holman Jenkins; Explore/examine World Financialization Data
Week 14 (April 25) Market Microstructure and Regulation and Review of Main Points
Primer on Market Microstructure: Transactions Costs & Market Clearing/Making; Bid-Ask Spread; Arbitrage
Related Links: WSJ Market Data Center; NYSE; CME Grouputures; 1987 Market Crash; See Wiki for Stock, Bond, Futures:
Week 15 (May 1) Exam II
Why are FX rates hard to predict or explain?
Fx Rates: Why are FX Rates Hard to Predict + FX Rate Conundrum Micro-Macro Disconnect and PPP or Can Oil Prices Forecast Exchange Rates
Related Links: Rational Speculation & Exchange Rates (JME) Conflicts and Commodity Prices Exchange Rates and Business Cycles
MacroFinance Policy Issues & Questions
Assignments/Presentations: Undergrads read 3 of following articles. Grad students read all plus Robust Capital. Assemble a 10 minute PPT that addresses 1) source(s) of 2008 crash; 2) Fed reactions to crash; 3) Future Policy Changes/Improvements. Don't simply do a summary. Read/assess/weigh the points and try to come to your own conclusions
Boston Fed President on Crisis & Policy William Poole Key Questions about Fed Actions (Book Review) Cochrane on Financial Crisis and Policy + Hamilton Reply
NY Fed President Lessons from the Crisis Jenkins Next Bailout the Last Taming Too Big To Fail (Dallas Fed Speech)
Grad Student Extra: Robust Capital Regulation
Related Links: Measuring Bank Specific Systemic Risk Influences on Systemic Bank Risk Fed Reactions to Crisis (Dallas Fed)
Does CEO Pay Make Economic Sense? Is CEO Pay Really Inefficient? CEO Pay Jenkins (Reply to Question) CEO Pay Reynolds
How Sustainable/Unstustainable Is Kentucky's Long Run Fiscal Situation? Excel File on KY (update for 2012; for more info see KTRS report Financial or Actuarial http://ktrs.ky.gov/05_publications/index.htm
How Much Did the Size of a Nation's Financial Sector (finanialization) Matter for the 2008 crash and Why: World Financialization Data
Examining the Relationship between Gold & Silver Prices since 2007
Relationships between Stock Prices and Commodity Prices
Similarities and Differences in the Crashes of 1929 and 2008
Ideas and Policies for Regulation of Systemic Risk: Vox Critical Assessment Dodd-Frank Zingales - JAcctResearch May 2009)
Do Central Banks (such as the Fed) Increase or Decrease Systemic Risk?
Insider Trading: Insider Trading Debates + CEE on Insider Trading
Convergence and Divergence in Eurozone Bond Spreads and What's Down the Road?
Was There a Real Estate Bubble and How Would One Decide? Dallas Fed on Real Estate Prices Hamilton May 08 Shiller Real Estate Data
What's Been Driving Commodity Pricing: Hamilton June 08 + Hamilton (Nov 09) + SWP Stuck on Stupid + SWP Reply to Hamilton + Vox on Financialization of Commodities
Commodity Price Boom in Perspective Did Easy Money Fuel Commodity Boom
Related Links: Limits on Short TransactinsOverstock.com; Limits on Short TransactionsInvestopedia
SEC Study on Marked to Market Accounting
Debates about Financial Market Regulation Part 2
Wiki Terms: Clearinghouse; Counterparty Risk; Principal-Agent Problem
Undergrad Assignment (15 min. PPT on Core Issues in Financial Market Regulation & Analysis of Dodd-Frank Legislation
( ; Krozner Corporate Governance CEE (SWP - Agency Problems 9-09)
Grad Assignment: Basics of Clearinghouses and Reasons for and Against Centralized Clearinghouse System (See above + Wiki and SWP - Counterparty Risk 8-09 SWP - 5-09)
Related Links: Criminalizing Agency Costs Homan Jenkins (WSJ articles); Overview of Issues in Corprate Governance (frb-ny 2002)
Squam Lake Working Group on Financial Regulation (Clearinghouses; Overall; ...)