Economics 252
Financial Markets


Course Outline (As of April 26, 2008, subject to change) for Spring 2008

Problem Sets

Reserve Books

Robert J. Shiller, Room 11a, 30 Hillhouse, 432-3708
robert.shiller@yale.edu, Office Hours: Monday, 4:00-6:00pm

Administrative Assistant: Carol Copeland, Room 10, 30 Hillhouse, carol.copeland@yale.edu, 432-3726

Teaching assistants:

Santosh Anagol, santosh.anagol@yale.edu

Christian Awuku-Budu, christian.awuku-budu@yale.edu

Yaxin Duan, yaxin.duan@yale.edu

Usman Ali, usman.ali@yale.edu

Xiaolan Zhou, xiaolan.zhou@yale.edu

Course Prerequisites: Economics 115 and 116.

Course Description: Financial institutions are a pillar of civilized society, supporting people in their productive ventures and managing the economic risks they take on. The workings of these institutions are important to comprehend if we are to predict their actions today and their evolution in the coming information age. The course strives to offer understanding of the theory of finance and its relation to the history, strengths and imperfections of such institutions as banking, insurance, securities, futures, and other derivatives markets, and the future of these institutions over the next century.

Math in the Course: You will be expected to have some facility with elementary algebra and calculus. Course exams will be roughly 1/2 math and theory problems and 1/2 facts and general understanding about financial markets.

Guest lecturers: Andrew Redleaf, Stephen Schwarzman, David Swensen, Carl Icahn, Lawrence Summers (Okun Lectures).

Course Grading: There will be two midterms, a final exam, and roughly biweekly problem sets. The problem sets will roughly count 10% of the grade, the first midterm 20%, the second midterm 30%, the final 40%. Final grades will be awarded subject to judgment involving teaching assistants.

Course Reading: In contrast to some other economics courses, in this course you will be expected to know institutional and historical detail covered. Exams will not be open book.

Required Purchases, Three Books (Labyrinth Books, 290 York Street, near Toad's Place):

Frank J. Fabozzi, Franco Modigliani, Frank J. Jones, and Michael G. Ferri, Foundations of Financial Markets and Institutions, 3rd ed., Prentice Hall, 2002.

Shiller, Robert J., Irrational Exuberance, 2nd Edition, Doubleday, 2006.

Siegel, Jeremy J., Stocks for the Long Run, 4th Edition, 2008.

Schedule of Lectures and Exams (subject to change):

    TR> <
    Lecture 1 January 14 Finance and Insurance as Powerful Forces in our Economy and Society[LECTURE 1 (ppt) ]
    • FMJF, Chapters 1, 2
    • Shiller, Prefaces, Chapter 1
    Lecture 2 January 16

    Begin problem Set #1
    The Universal Principle of Risk Management: Pooling and the Hedging of Risks [LECTURE 2 (ppt) ]
        
    • Siegel, Chapter 1, Appendix 2, p. 12
    Lecture 3 January 18 (Note: Extra Friday Lecture, Yale Calendar says "Friday classes do not meet, Monday classes meet instead."


    Technology and Invention in Finance [LECTURE 3 (ppt)]
        
    Lecture 4 January 28Problem set #1 due, Begin problem set #2

    Portfolio Diversification and Supporting Financial Institutions (CAPM Model) [LECTURE 4 (ppt) ]
    • FMJF Chapter 8, Chapter 13
    • Siegel, Chapters 1 and 2
    Lecture 5 January 30 Insurance: The Archetypal Risk Management Institution [LECTURE 5 (ppt) ]
    • FMJF, Chapter 7
    Lecture 6 Friday February 1 (Note: extra Friday lecture to make up for missed January 23 lecture)
    Efficient Markets vs. Excess Volatility [LECTURE 6 (ppt) ]
    • Shiller, Chapters 10, 11
    • Swensen, Pioneering Portfolio Management, Chapter 8, Alternative Asset Classes (Reserve CCL)
    • Siegel Chapters 3, 4, 5, 16, 17, 18
    Lecture 7 Monday February 4
    Problem Set #2 due.
    Begin problem set #3


    Behavioral Finance: The Role of Psychology [LECTURE 7 (ppt) ]
    Lecture 8 February 6 Human Foibles, Fraud, Manipulation, and Regulation [LECTURE 8 (ppt) ]
    • Shiller, Chapters 5, 6, 7
    • FMJF, Chapter 3
    • Brandeis, Louis D., Other People’s Money and How the Bankers Use It, Augustus M. Kelley, Publishers, Reprints of Economic Classics, New York 1971 [1914]. Chapter V, "What Publicity Can Do," pp. 92-108. (Reserve CCL)
    • Douglas, William O., Democracy and Finance Yale University Press, New Haven, 1940. Chapter 1, "The Forces of Disorder, pp. 5-17. (Reserve CCL)
    Guest Lecture David Swensen February 13
    Lecture 9 Friday February 15 (Note: extra lecture to make up for missed Feb 11 lecture)
    Debt Markets: Term Structure [LECTURE 9 (ppt) ]
    • FMJF, Chapters 10, 11, 12, 16, 17
    February 18 MIDTERM #1
    Lecture 10 February 20 Start Problem Set #4 Stocks [LECTURE 10 (ppt) ]
    • Siegel, Chapters 6, 7, 8, 9
    • Brealey Myers & AllenPrinciples of Corporate Finance, Eighth Edition, 2005, Chapter 16, "Payout Policy," Chapter 17 "Does Debt Policy Matter?"(Reserve CCL)
    • Johnson, Simon, Rafael La Porta, Florencio Lopez-di-Silanos, and Andrei Shleifer, "Tunneling," American Economic Review, 2000, 90(2):22-7. (JSTOR)
      • Brealy, Myers and Allen, Chapter 17, "Does Debt Policy Matter?" (Reserve CCL)
    Lecture 11 February 25 Real Estate Finance and its Vulnerability to Crisis [LECTURE 11 (ppt)]
    • FMJF, Chapters 4, 23, 24, 25
    • Shiller, Chapter 2
    Lecture 12 March 3

    Problem set #4 due Begin problem set #5
    Banking: Successes and Failures [LECTURE 12 (ppt) )]
    Guest Lecture March 5 Andrew Redleaf
    Spring Recess
    Guest Lecture 4pm Monday March 24 Carl Icahn, Icahn Enterprises
    Problem set #5 due
  • Leslie Stahl, "The Icahn Lift"
  • Lecture 13 March 26 The Evolution and Perfection of Monetary Policy [LECTURE 13 (ppt) ]
    • FMJF, Chapter 5, 6
    • Siegel, Chapters 11, 12, 13
    • Hawtrey, R. G., The Art of Central Banking, Longmans, Green and Co., London, 1932, beginning of Chapter IV, "The Art of Central Banking," pp. 116-123. (Reserve, CCL)
    March 31 MIDTERM #2
    Lecture 14 April 2
    Investment Banking and Secondary Markets [LECTURE 14 (ppt) ]
    • FMJF, Chapters 14, 15
    Lecture 15 April 7
    Professional Money Managers and their Influence [LECTURE 15 (ppt) ]
    • FMJF, Chapter 9
    • O'Barr, William M. and John M. Conley, Fortune & Folly: The Wealth & Power of Institutional Investing, Business-One Irwin, Homewood Illinois, 1992, Chapter 10, pp. 225-236. (Reserve CCL)
    • Swensen, David, Pioneering Portfolio Management Chapter 2, "Endowment Purposes."(Reserve CCL)
    Lecture 16 April 9 Brokerage, ECNs, etc. [LECTURE 16 (ppt) ]
    • FMJF, Chapters 18, 19, 20, 21, 22
    Guest Lecture 9am Friday April 11 Stephen Schwarzman , co-founder, Blackstone Group
  • Biography
  • Lecture April 14
    Begin problem set #6
    Forwards & Futures [LECTURE 17 (ppt) ]
    • FMJF, Chapter 26, Chapter 28, pp. 541-549
    • Working, Holbrook, "Futures Trading and Hedging," American Economic Review, June 1953, pp. 314-43. Reprinted in Selected Writings of Holbrook Working. (JSTOR)
    Lecture 18 April 16
    Stock Index, Oil and other Futures Markets [LECTURE 18 (ppt) ]
    • FMJF, Chapter 29
    Lecture 19 April 21 Problem Set #6 due
    Options Markets [LECTURE 19 (ppt) ]
    • FMJF, Chapter 27, , 28, 29, 30, 31
    Lecture 20 April 23 Making It Work for Real People: The Democratization of Finance [LECTURE 20 ]
    • Sullivan, Teresa, Elizabeth Warren and Jay Lawrence Westbrook, The Fragile Middle Class: Americans in Debt, Yale University Press, 2000, Chapter 8, pp. 238-61. (Reserve CCL)
    • Unger, Peter, Living High and Letting Die: Our Illusion of Innocence, New York: Oxford University Press, 1996.
    • Shiller, Chapter 11
    Guest Lecture 4pm Tuesday April 29 Lawrence Summers, Harvard University Okun Lecture: Learning from and Responding to Financial Crisis, Part I
  • Biography
  • Guest Lecture 4pm Wednesday April 30 Lawrence Summers, Harvard University Okun Lecture: Learning from and Responding to Financial Crisis, Part II
  • Biography