Aaron Hoos

Okay, some of you will look at this blog post and nominate it as the boringest blog post of the year. But not me! I love this stuff! Here are 26 Financial Theory (ECON251) classes from Yale, along with a “table of contents” from each video.

FINANCIAL THEORY

ECON251 Financial Theory with John Geanakoplos
Download the course material for this course at Yale’s Open Course site.

Lecture 1: Why Finance?
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Course Introduction
10:16 – Chapter 2. Collateral in the Standard Theory
17:54 – Chapter 3. Leverage in Housing Prices
33:47 – Chapter 4. Examples of Finance
46:13 – Chapter 5. Why Study Finance?
50:13 – Chapter 6. Logistics
58:22 – Chapter 7. A Experiment of the Financial Market

Lecture 2: Utilities Endowments and Equilibrium
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Introduction
07:04 – Chapter 2. Why Model?
13:30 – Chapter 3. History of Markets
24:41 – Chapter 4. Supply and Demand and General Equilibrium
37:59 – Chapter 5. Marginal Utility
45:20 – Chapter 6. Endowments and Equilibrium

Lecture 3: Computer equilibrium
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Introduction
02:48 – Chapter 2. Welfare and Utility in Free Markets
16:52 – Chapter 3. Equilibrium amidst Consumption and Endowments
32:43 – Chapter 4. Anticipation of Prices
52:53 – Chapter 5. Log Utilities and Computer Models of Equilibrium

Lecture 4: Efficiency, Assets and Time
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Is the Free Market Good? A Mathematical Perspective
11:20 – Chapter 2. The Pareto Efficiency and Equilibrium
38:42 – Chapter 3. Fundamental Theorem of Economics
46:27 – Chapter 4. Shortcomings of the Fundamental Theorem
52:39 – Chapter 5. History of Mathematical Economics
01:00:21 – Chapter 6. Elements of Financial Models

Lecture 5: Present Value and the Real Rate of Interest
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Implications of General Equilibrium
03:08 – Chapter 2. Interest Rates and Stock Prices
22:06 – Chapter 3. Defining Financial Equilibrium
33:41 – Chapter 4. Inflation and Arbitrage
43:35 – Chapter 5. Present Value Prices
57:44 – Chapter 6. Real and Nominal Interest Rates

Lecture 6: Irving Fisher’s Impatience Theory of Interest
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. From Financial to General Equilbrium
06:44 – Chapter 2. Applying the Principle of No Arbitrage
23:50 – Chapter 3. The Fundamental Theorem of Asset Pricing
39:25 – Chapter 4. Effects of Technology in Fisher Economy
51:31 – Chapter 5. The Impatience Theory of Interest
01:06:48 – Chapter 6. Conclusion

Lecture 7: Shakespeare’s Merchant of Venice and Collateral, Present Value and the Vocabulary of Finance
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Introduction
01:23 – Chapter 2. Contracts in Merchant of Venice
20:23 – Chapter 3. The Doubling Rule
36:07 – Chapter 4. Coupon Bonds, Annuities, and Perpetuities
54:24 – Chapter 5. Mortgage
59:15 – Chapter 6. Applications of Financial Instruments

Lecture 8: How a Long-Lived Institution Figures an Annual Budget. Yield
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Yale’s Budget Set
03:37 – Chapter 2. Analysis of Yale’s Expenditures and Endowment
31:51 – Chapter 3. Yield to Maturity and Internal Rate of Return
51:52 – Chapter 4. Assessing Performance of Coupon Bond

Lecture 9: Yield Curve Arbitrage
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Defining Yield
09:07 – Chapter 2. Assessing Market Interest Rate from Treasury Bonds
35:46 – Chapter 3. Zero Coupon Bonds and the Principle of Duality
50:31 – Chapter 4. Forward Interest Rate
01:10:05 – Chapter 5. Calculating Prices in the Future and Conclusio

Lecture 10: Dynamic Present Value
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Dynamic Present Values
08:49 – Chapter 2. Marking to Market
39:53 – Chapter 3. Mortgages and Backward Induction
50:42 – Chapter 4. Remaining Balances and Amortization
54:52 – Chapter 5. Weaknesses in the U.S. Social Security System

Lecture 11: Social Security
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Introduction
03:53 – Chapter 2. The Development of the U.S. Social Security System
19:16 – Chapter 3. Economic Imbalances in Social Security
38:48 – Chapter 4. Root Causes of Income Transfer in Social Security
01:05:21 – Chapter 5. Privatization of U.S. Social Securit

Lecture 12: Overlapping Generations Models of the Economy
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Introduction to the Overlapping Generation Model
12:59 – Chapter 2. Financial and General Equilibrium in Social Security
26:37 – Chapter 3. Present Value Analysis of Social Security
59:24 – Chapter 4. Real Rate of Interest and Social Securit

Lecture 13: Demography and Asset Pricing: Will the Stock Market Decline when the Baby Boomers Retire?
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Stationarity and Equilibrium in the Overlapping Generations Model
16:38 – Chapter 2. Evaluating Tobin’s Thoughts on Social Security
35:07 – Chapter 3. Birth Rates and Stock Market Levels
01:02:30 – Chapter 4. Philosophical and Statistical Framework of Uncertainty

Lecture 14: Quantifying Uncertainty and Risk
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Expectation, Variance, and Covariance
19:06 – Chapter 2. Diversification and Risk Exposure
33:54 – Chapter 3. Conditional Expectation
53:39 – Chapter 4. Uncertainty in Interest Rates

Lecture 15: Uncertainty and the Rational Expectations Hypothesis
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. The Rational Expectations Hypothesis
12:18 – Chapter 2. Dependence on Prices in a Certain World
24:42 – Chapter 3. Implications of Uncertain Discount Rates and Hyperbolic Discounting
46:53 – Chapter 4. Uncertainties of Default

Lecture 16: Backward Induction and Optimal Stopping Times
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Calculating Default Probabilities
14:58 – Chapter 2. Relationship Between Defaults and Forward Rates
28:09 – Chapter 3. Zermelo, Chess, and Backward Induction
36:48 – Chapter 4. Optimal Stopping Games and Backward Induction
01:06:47 – Chapter 5. The Optimal Marriage Problem

Lecture 17: Callable Bonds and the Mortgage Prepayment Option
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Introduction to Callable Bonds and Mortgage Options
12:14 – Chapter 2. Assessing Option Value via Backward Induction
42:44 – Chapter 3. Fixed Rate Amortizing Mortgage
57:51 – Chapter 4. How Banks Set Mortgage Rates for Prepayers

Lecture 18: Modeling Mortgage Prepayments and Valuing Mortgages
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Review of Mortgages
03:20 – Chapter 2. Complications of Refinancing Mortgages
19:26 – Chapter 3. Non-contingent Forecasts of Mortgage Value
28:40 – Chapter 4. The Modern Behavior Rationalizing Model of Mortgage Value
54:07 – Chapter 5. Risk in Mortgages and Hedging

Lecture 19: History of the Mortgage Market: A Personal Narrative
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Fannie Mae, Freddie Mac, and the Mortgage Securities Market
17:01 – Chapter 2. Collateralized Mortgage Obligations
22:44 – Chapter 3. Modeling Prepayment Tendencies at Kidder Peabody
35:40 – Chapter 4. The Rise of Ellington Capital Management and the Role of Hedge Funds
52:52 – Chapter 5. The Leverage Cycle and the Subprime Mortgage Market
01:13:51 – Chapter 6. The Credit Default Swap
01:18:36 – Chapter 7. Conclusion

Lecture 20: Dynamic Hedging
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Fundamentals of Hedging
15:38 – Chapter 2. The Principle of Dynamic Hedging
24:26 – Chapter 3. How Does Hedging Generate Profit?
43:48 – Chapter 4. Maintaining Profits from Dynamic Hedging
54:08 – Chapter 5. Dynamic Hedging in the Bond Market
01:10:30 – Chapter 6. Conclusion

Lecture 21: Dynamic Hedging and Average Life
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Review of Dynamic Hedging
09:15 – Chapter 2. Dynamic Hedging as Marking-to-Market
19:55 – Chapter 3. Dynamic Hedging and Prepayment Models in the Market
30:50 – Chapter 4. Appropriate Hedges against Interest Rate Movements
01:05:15 – Chapter 5. Measuring the Average Life of a Bon

Lecture 22: Risk Aversion and the Capital Asset Pricing Theorem
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Risk Aversion
03:35 – Chapter 2. The Bernoulli Explanation of Risk
12:38 – Chapter 3. Foundations of the Capital Asset Pricing Model
22:15 – Chapter 4. Accounting for Risk in Prices and Asset Holdings in General Equilibrium
54:11 – Chapter 5. Implications of Risk in Hedging
01:09:40 – Chapter 6. Diversification in Equilibrium and Conclusio

Lecture 23: The Mutual Fund Theorem and Covariance Pricing Theorems
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. The Mutual Fund Theorem
03:47 – Chapter 2. Covariance Pricing Theorem and Diversification
25:19 – Chapter 3. Deriving Elements of the Capital Asset Pricing Model
40:25 – Chapter 4. Mutual Fund Theorem in Math and Its Significance
52:36 – Chapter 5. The Sharpe Ratio and Independent Risks
01:04:19 – Chapter 6. Price Dependence on Covariance, Not Variance

Lecture 24: Risk, Return, and Social Security
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Testing the Capital Asset Pricing Model
14:08 – Chapter 2. Evaluation of Fund Management Performance Using CAPM
22:30 – Chapter 3. Reassessing Assets within Social Security
53:04 – Chapter 4. Reconciling Democratic and Republican Views on Social Security
59:32 – Chapter 5. Geanakoplos’s Personal Annuitized Average Wage Securities
01:08:48 – Chapter 6. The Black-Scholes Model

Lecture 25:The Leverage Cycle and the Subprime Mortgage Crisis
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Assumptions on Loans in the Subprime Mortgage Market
18:27 – Chapter 2. Market Weaknesses Revealed in the 2007-2009 Financial Crisis
29:00 – Chapter 3. Collateral and Introduction to the Leverage Cycle
38:53 – Chapter 4. Contrasts between the Leverage Cycle and CAPM
43:36 – Chapter 5. Leverage Cycle Theory in Recent Financial History
01:03:55 – Chapter 6. Negative Implications of the Leverage Cycle
01:14:14 – Chapter 7. Conclusion

Lecture 26: Utilities Endowments and Equilibrium
[Click here and the video will open in a new window]
Video contents:
00:00 – Chapter 1. Introduction
02:15 – Chapter 2. Understanding Leverage
13:45 – Chapter 3. Supply and Demand Effects on Interest Rates and Leverage
21:52 – Chapter 4. Impatience and Volatility on Setting Leverage
34:48 – Chapter 5. Bad News, Pessimism, Price Drops, and Leverage Cycle Crashes
48:01 – Chapter 6. Can Leverage Be Monitored?

If you invest, or if you pay attention to the economy, read this article. Period.

Why Retail Investors Still Avoid Stocks – BusinessWeek.

Great insight from Brad Barber of the University of California, Davis. And retail investors (that’s the regular folk who invest their hard-earned money) should particularly pay attention to the answer to the question “What is the track record of smaller investors? Do they tend to buy and sell at the right times?“

Wow. This is crazy! Iceland’s former Prime Minister Geir Haarde (who served as Finance Minister from 1998 to 2005 and then as Prime Minister from 2006 to 2009) has been indicted for economic mismanagement that led up to the economic collapse of that country in 2008.

Iceland’s Haarde Is First Leader Indicted Over Crisis – BusinessWeek.

This is fascinating! As the article points out, political leaders have been indicted for war crimes in the past but they’ve never been indicted for economic mismanagement… until now. The assertion by the lawmakers is that Haarde had been negligent in allowing the finances of the country’s banks to get out of hand and thus broke the law of ministerial responsibility.

Here are my thoughts: Haarde is being held up as a scapegoat for (what I believe is) a populist agenda. Current leaders are conveniently placing blame on the shoulders of former leaders. Yes, politicians should be held accountable for their conduct and misconduct. Yes, politicians need to work with the country’s best interests in mind. Yes, the laws of the land prevail even over politicians.

But, Haarde as the country’s former figurehead and as the former finance minister should not be the only one held to this degree of accountability. This indictment seems singularly focused on Haarde alone. However, he did not work alone to create this situation. Not only is the economic situation the result of a myriad of factors, it also didn’t just take place while he was in office. The economic structure that led up to this collapse was developed well before 1998 (when Haarde started as Finance Minister). So was the desire for banks to accept debt and take an increasing amount of risk. So was the need for people to pay with debt instead of cash. So was the willingness of businesses to accept more debt-based payment options.

Icelandic lawmakers might feel better by pointing an accusing finger at one person and saying that he was responsible for the entire economic collapse of the country but it doesn’t place blame appropriately. If they are truly looking for someone to blame, they need to blame banks, lenders, currency traders, politicians, businesses, consumers, and other countries.

The global economic situation (of which Iceland was an unfortunate, participating victim) is part of the natural ebb and flow of economics. It can be controlled slightly but it is never going to be completely avoidable and indicting one person for a country’s financial woes is unreasonable.

Good news for entrepreneurs (or, at least for people planning to become entrepreneurs in the next 1-3 years).

During periods of economic growth, consumer spending injects cash into the economy, and free-flowing cash is exactly what makes an economy stronger.

Entrepreneurs and economists are concerned right now because people aren’t spending money at levels needed to bolster the economy. According to the Financial Post article “Fed stuck in zero-rate game” (Paul Vieira, Sept 20, 2010), “consumers are opting to pay down debt instead of spending on goods”.

It’s one of those things that sounds strange even though it’s true — paying down debt isn’t as good as spending… at least when it comes to economic growth. Instead, consumers are a licking their economic wounds and understandably getting credit histories in order. They’re forgoing purchasing in the short-term to fix their personal credit.

Although entrepreneurs and economists are understandably worried, I think it’s good news — for those with a 1-3 year view. Once people have paid off some debt, they’ll start spending again… And I believe they’ll start spending with exubrance. By the time they start spending again, they’ll have long forgotten why they weren’t spending, AND, they’ll have improved credit ratings and credit limits and buying power.

I believe this is a great time to start a business or deepening the positioning of a current business. If you can survive The Great Debt Payoff, I think you’ll reap some serious rewards down the road.

It wasn’t that long ago that people wouldn’t pay more than about $50 for jeans. Now, $300 plus is a distinct possibility. You can’t just blame inflation. There’s been a transition in how we define luxury.

In this article, Dan and Chip Heath talk about how luxury has changed and why products that weren’t luxurious can become luxurious.

The Inevitability Of $300 Socks – Jeans – Luxury – Connoisseur | Fast Company.

If you sell products, read this article. Find out how your products can become high-end luxuries.