Understanding Financial Markets and Institutions: An Introduction - Prof. M. Katayama, Study notes of Economics

Download Understanding Financial Markets and Institutions: An Introduction - Prof. M. Katayama and more Study notes Economics in PDF only on Docsity! CHAPTER  1:   INTRODUCTION   What  to  Study?   •  How  financial  markets  such  as  bond,  stock  and   foreign  exchange  markets  work   •  How  financial  ins=tu=ons  such  as  banks  and   insurance  companies  work   •  The  role  of  money  in  the  economy   These  are  important  for  understanding  business   cycle  and  financial  crises   1   Financial  Markets   •  Stock  Market   –  Common  stock  represents  a  share  of  ownership  in  a   corpora=on   – A  share  of  stock  is  a  claim  on  the  earnings  and  assets   of  the  corpora=on   •  Foreign  Exchange  Market   –  The  foreign  exchange  market  is  where  funds  are   converted  from  one  currency  into  another   –  The  foreign  exchange  rate  is  the  price  of  one  currency   in  terms  of  another  currency   4   Dow  Jones  Industrial  Average:   1928-­‐2010   0   2000   4000   6000   8000   10000   12000   14000   16000   19 28   19 32   19 36   19 40   19 44   19 48   19 52   19 56   19 60   19 64   19 68   19 72   19 76   19 80   19 84   19 88   19 92   19 96   20 00   20 04   20 08   5   Japanese  Yen  /  US  Dollar  (¥/$)   Exchange  Rate     50   100   150   200   250   300   350   400   Ja nu ar y-­‐ 71   De ce m be r-­‐ 72   N ov em be r-­‐ 74   O ct ob er -­‐7 6   Se pt em be r-­‐ 78   Au gu st -­‐8 0   Ju ly -­‐8 2   Ju ne -­‐8 4   M ay -­‐8 6   Ap ril -­‐8 8   M ar ch -­‐9 0   Fe br ua ry -­‐9 2   Ja nu ar y-­‐ 94   De ce m be r-­‐ 95   N ov em be r-­‐ 97   O ct ob er -­‐9 9   Se pt em be r-­‐ 01   Au gu st -­‐0 3   Ju ly -­‐0 5   Ju ne -­‐0 7   M ay -­‐0 9   Ap ril -­‐1 1   6   Money  and  Business  Cycle   •  Money  can  play  an  important  role  in  crea=ng   fluctua=ons  in  output  (expansions  and   recessions)   •  Business  cycle  affects  all  of  us   –  Income  /  consump=on   – Unemployment  rate  etc...   •  Monetary  Theory  =es  changes  in  the  money   supply  to  changes  in  aggregate  economic   ac=vity  and  the  price  level   9   Basic  Analy=cal  Framework   •  A  simplified  approach  to  the  demand  for  assets   •  The  concept  of  equilibrium   •  Basic  supply  and  demand  to  explain  behavior  in   financial  markets   •  The  search  for  profits   •  An  approach  to  financial  structure  based  on   transac=on  costs  and  asymmetric  informa=on   •  Aggregate  supply  and  demand  analysis   10   Data   •  It  is  always  a  good  idea  to  look  at  actual  data   •  Federal  Reserve  Board   hgp://www.federalreserve.gov/econresdata/ releases/sta=s=csdata.htm   •  FRED  of  St.  Louis  Fed   hgp://research.stlouisfed.org/fred2/   11