Financial Markets
1
Introduction
I Financial markets: description
2
Participants
2.1
Data gathering preamble
2.2
Accounting preamble
2.3
Those who need money
2.3.1
Equity need of corporates
2.3.2
Debt needs of corporates, governments and households
2.3.3
Households
2.4
Those who save money
2.4.1
Asset manager / Investment manager
2.4.2
Insurance Companies
2.4.3
Pension funds
2.4.4
Endowment and foundations
2.4.5
Sovereign funds
3
Financialisation
3.1
The need for liquidity: markets
3.2
The need for protection: regulation
3.3
Intermediaries
3.3.1
Banks
3.3.2
Broker/dealer
3.4
Markets
3.4.1
Exchange Traded Markets
3.4.3
Volumes
4
Financial instruments
4.1
A minimal toolbox, before starting
4.1.1
Compounding / discounting
4.1.2
Risk measurement
4.2
Stocks
4.2.1
Description
4.2.2
Financial analysis
4.3
Rates and bonds
4.3.1
Rates
4.3.2
Mortgages
4.3.3
Bullet bond
4.3.4
Forward rates
4.4
Derivatives
4.4.1
Forward contracts
4.4.2
Futures
4.4.3
Options
5
Optimal individual choices
5.1
The Expected Utility framework
5.1.1
VNM theory
5.1.2
Risk aversion and risk premia,
5.2
Mean-variance choices
5.2.1
Wealth equation
5.2.2
Optimal portfolio
II Equilibrium and no Arbitrage
6
Equilibrium, efficiency and the ability to “beat the market”
Introduction
6.1
The efficiency debate
6.2
Empirical evidence
6.2.1
Serial correlation
6.2.2
Active asset management
6.3
Toy models of markets with asymmetric information
6.3.1
Grosman and Stiglitz
6.3.2
Kyle
6.4
Capital Asset Pricing Model
6.4.1
Equilibrium & CAPM
6.5
Conclusions on equilibrium
7
No arbitrage and pricing theory
Introduction
7.1
Fundamental Theorem of Asset Pricing
7.1.1
Framework
7.1.2
Theorem
7.1.3
Risk Neutral Probability
7.1.4
Completeness
7.2
Ross APT
7.2.1
The model
7.2.2
The modern consequences: the temptation for “easy” Risk Premia
8
Option pricing
Introduction
8.1
Model and assumptions
8.2
Arbitrage bounds and payoff generation
8.3
The Black-Scholes-Merton analysis
8.3.1
The Black-Scholes formula
8.3.2
The greeks
8.4
Time value and local time: the difference between a stop-loss and a put strategy
8.4.1
The paradox
8.4.2
Resolution
8.4.3
Cost of leverage
8.5
Some implications in Corporate Finance
III Let the data speak
9
Monovariate Asset returns phenomonology
9.1
Volatility clustering
9.2
Fat tails
9.3
Trend estimation
10
Multivariate Asset returns
10.1
PCA analysis
IV Some technicalities
11
Probability cheatsheet
11.1
Gaussian distribution
12
References
Financial Markets
Practice and theory of financial markets
Chapter 10
Multivariate Asset returns
10.1
PCA analysis