The exchanges in which stocks and other securities are traded serve an important function in finance. They bring together people interested in buying and selling securities in order to create a universal price. Brokers and dealers are also an important part of the system, their methods and standards are ultimately behind the success of the exchanges. Many information innovations have advanced the functioning of exchanges, going all the way back to the ticker machine, which was created to communicate the price of securities at a point in time to all interested parties. Electronic Communication Networks and automatic exchanges, more generally, have significantly impacted the exchange of securities and few exchanges still have physical trading floors.

19 - Brokerage, ECNs, etc.

Most people are not very good at dealing in financial markets. Professional money managers, such as financial advisors and financial planners, assist individuals in matters of personal finance. FINRA and the SEC monitor the activities of these managers in order to protect individual investors. Mutual funds, exchange traded funds also exist to assist individual investments, and pension funds provide further services. These investment institutions help people to put money in diversified portfolios and, in some cases, reap some tax benefits for funding their retirement income.

18 - Professional Money Managers and Their Influence

Behavioral Finance is a relatively recent revolution in finance that applies insights from all of the social sciences to finance. New decision-making models incorporate psychology and sociology, among other disciplines, to explain economic and financial phenomenon, such as erratic stock price variations. Psychological patterns such as overconfidence and perceived kinks in the value function seem to impact financial decision-making, but are not included in classical theories such as the Expected Utility Theory. Kahneman and Tversky's Prospect Theory addresses such issues and sheds light on irrational deviations from traditional decision-making models.

07 - Behavioral Finance: The Role of Psychology

Lawrence Summers

In the second of his two lectures in honor of Arthur Okun, Professor Summers points out that real interest rates have been very low in the current subprime crisis. This indicates that the shock to the economy was more a financial breakdown shock than a disinflation shock. But financial breakdown shocks are not necessarily very harmful to the economy, so long as financial intermediation capital is not destroyed. In a financial crisis like the present one, financial firms are likely to take the step of decreasing their leverage, often by contracting loans, which creates its own risks for the economy. Regulators should place pressure on financial institutions to raise their capital and should intervene in near foreclosure situations, but should not attempt to support housing prices.

26 - Learning from and Responding to Financial Crisis, Part II (Guest Lecture by Lawrence Summers)

Professor Summers, former U. S. Treasury Secretary and former President of Harvard University, in this the first of two lectures in honor of former Yale Professor and Council of Economic Advisors chairman Arthur Okun, offers thoughts on the role of monetary policy in economic fluctuations, past and present. In the "Okun period," ending about when Okun died in 1980, the monetary authorities were very much involved in actually creating economic contractions. Inflation would repeatedly get out of control, the Fed would hit the brakes, and the economy would slow. But, that is not the story of the economic cycles of the last two decades. Recent economic cycles appear to be connected with factors endogenous to the financial system, such as bubbles or cycles of complacency among lending institutions. Summers argues that to understand the financial markets and the economy, we must consider models of multiple equilibria, such as bank run models, where a change in confidence may shift the economy drastically without any change in fundamentals.

25 - Learning from and Responding to Financial Crisis, Part I (Guest Lecture by Lawrence Summers)

Professor Shiller, in his final lecture, reviews some of the most important tools for individual risk management. Significant inequality in domestic and international communities has created a need for social insurance programs, such as those created in Germany in the late 1800s. The tax system, bankruptcy laws, and government insurance programs are used to manage risk of personal wealth. However, each of these inventions must take account of psychological factors, such as moral hazard, in order to be effective without eliminating incentives to participate in the workforce, or other negative side effects. With regard to careers, including those in finance, young people should frame decisions with morality and purpose in mind, and with a broad perspective of both.

24 - Making It Work for Real People: The Democratization of Finance

Options introduce an essential nonlineary into portfolio management. They are contracts between buyers and writers, who agree on exercise prices and dates at which the buyer can buy or sell the underlying (such as a stock). Options are priced based on the price and volatility of the underlying asset as well as the duration of the option contract. The Black-Scholes options pricing model is one of the most famous equations in finance and offers a useful first approximation for prices for option contracts. Options exchanges and futures exchanges both are involved in creating a liquid and transparent market for options. Options are not just for stocks; they are also important for other asset classes, such as real estate.

23 - Options Markets

Futures markets have expanded far beyond their initial application to farmer's planting and harvest cycles. These markets now allow investors and traders to set prices for a broad spectrum of assets and for a whole term structure stretching into the distant future. Some of these markets are often priced according to simple fair-value formulae, others are not. Futures markets can be in backwardation, where the future price is lower than the present, spot price. They can also be in contango, where the price rises with maturity and is higher in the future than it is today. The S&amp;P/Case-Shiller Home Price Index is a recent invention that has transferred the mechanics of futures markets to the prices of single-family homes in ten real estate markets, in an effort to create a national market for residential real estate.

22 - Stock Index, Oil and Other Futures Markets

Futures markets were started in Osaka, Japan in the 1600s to create an authoritative and meaningful market price for agricultural products, using standardized contracts. Since then, futures markets have been copied around the world to allow the hedging various future risks, financial and other. In the United States, the Chicago Mercantile Exchange and the Chicago Board of Trade have been the most popular futures trading markets. Although futures markets are changing and becoming more electronic, they are still important risk management tools for farmers and present financial opportunities for all manner of hedgers and arbitrageurs.

21 - Forwards and Futures

Stephen Schwarzman

Stephen Schwarzman, Co-Founder of Blackstone Group, a private equity firm, speaks about his experience in the industry. He discusses his thoughts on global finance, particularly at such an interesting and challenging point in the history of financial institutions. Although the near future might be rough for the United States and economies around the globe, capital does tend to come back and regulators are busy figuring out how best to put safeguards on the system. He also offers career advice and mentions some of the surprises he came across upon entering the world of finance.

20 - Guest Lecture by Stephen Schwarzman, Co-founder, Blackstone Group

Very educational and the Prof obviously is up to date for the time the lectures are given. I find his speech patterns so bothersome I cannot listen further.

Ahh and umm are not useful

This is an excellent lecture series taught in a very understandable way with many star guest lecturers give in the middle of the subprime crisis.

Excellent Lecture

Financial Markets - Audio

Portfolio diversification is the most fundamental concept of risk management. The allocation of financial resources in stocks, bonds, riskless, assets, oil and other assets determine the expected return and risk of a portfolio. Taking account of covariances and expected returns, investors can create a diversified portfolio that maximizes expected return for a given level of risk. An important mission of financial institutions is to provide portfolio-diversification services.

04 - Portfolio Diversification and Supporting Financial Institutions (CAPM Model)

The stock market is the information center for the corporate sector. It represents individuals' ownership in publicly-held corporations. Although corporations have a variety of stakeholders, the shareholders of a for-profit corporation are central since the company is ultimately responsible to them. Companies offer dividends, stock repurchases and stock dividends to give profits back to shareholders or to signal information. Companies can also take on debt to raise capital, creating leverage. The Modigliani-Miller theory of a company's leverage in its simplest form implies the leverage ratio doesn't matter, but including bankruptcy costs and tax effects give us a positive theory of the ratio.

11 - Stocks

First, Professor Shiller discusses today's changing financial system and recent market stabilization reform introduced by U.S. Treasury Secretary Henry Paulson. The financial system is inherently unstable and would benefit from more surveillance, particularly for consumer protection issues, given the recent subprime mortgage crisis. Although this particular reform might not be successful, more regulators and policymakers are talking about changing the stabilization system and will likely alter the role of the Fed in the future.Second, Professor Shiller introduces the mechanics and role of investment banking. Investment banks underwrite securities and arrange for the issue of stocks and bonds by corporations. Corporations work with investment banks to navigate the Securities and Exchange Commission requirements for issuing securities. The banks then take on a "bought deal" or "best efforts deal" and help the corporation to find a market for the securities. Investment banking depends on the reputation of its bankers and, as we have seen recently, can be destroyed by rumors about the bank's insolvency.

First, Professor Shiller discusses today's changing financial system and recent market stabilization reform introduced by U.S. Treasury Secretary Henry Paulson. The financial system is inherently unstable and would benefit from more surveillance, particularly for consumer protection issues, given the recent subprime mortgage crisis. Although this particular reform might not be successful, more regulators and policymakers are talking about changing the stabilization system and will likely alter the role of the Fed in the future.<br>Second, Professor Shiller introduces the mechanics and role of investment banking. Investment banks underwrite securities and arrange for the issue of stocks and bonds by corporations. Corporations work with investment banks to navigate the Securities and Exchange Commission requirements for issuing securities. The banks then take on a "bought deal" or "best efforts deal" and help the corporation to find a market for the securities. Investment banking depends on the reputation of its bankers and, as we have seen recently, can be destroyed by rumors about the bank's insolvency.

17 - Investment Banking and Secondary Markets

Several theories in finance relate to stock price analysis and prediction. The efficient markets hypothesis states that stock prices for publicly-traded companies reflect all available information. Prices adjust to new information instantaneously, so it is impossible to "beat the market." Furthermore, the random walk theory asserts that changes in stock prices arise only from unanticipated new information, and so it is impossible to predict the direction of stock prices. Using statistical tools, we can attempt to test the hypotheses and to predict future stock prices. These tests show that efficient markets theory is a half-truth: it is difficult but not impossible for some people to beat the market.

06 - Efficient Markets vs. Excess Volatility

Real Estate is the biggest asset class and of great importance for both individuals and institutional investors. An array of economic and psychological factors impact real estate investment decisions and the public has changing ideas of real estate as a profitable investment. People's demand to buy a home by taking on long-term debt, called a mortgage, is often tied with the overall health of the economy and financial markets. In recessions, home buying tends to fall and the opposite holds in a strong economy. Commercial real estate, held indirectly by the public through partnerships and real estate investment trusts (REITs), is vulnerable to similar speculative activity. The most recent real estate boom illustrates the speculative nature of real estate, and its relation to financial and economic crises.

12 - Real Estate Finance and Its Vulnerability to Crisis

David Swensen

David Swensen, Yale's Chief Investment Officer and manager of the University's endowment, discusses the tactics and tools that Yale and other endowments use to create long-term, positive investment returns. He emphasizes the importance of asset allocation and diversification and the limited effects of market timing and security selection. Also, the extraordinary returns of hedge funds, one of the more recent phenomena of portfolio management, should be looked at closely, with an eye for survivorship and back-fill biases.

09 - Guest Lecture by David Swensen

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