Lecture 8 - 9.17.2008 - AEM 1200: An Overview of the...

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AEM 1200: An Overview of the Current Financial Crisis (9/17/2008) Principles of financial markets The causes: increase in liquidity, securitization and derivatives Consequences The Basic Financial System Holders of Funds  have capital that they are willing to lend (for a price) to people, firms,  or financial institutions; Financial institutions  (consumer banks, commercial banks, and private equity  institutions) agglomerate capital from holders of funds and look for reasonably risky and  profitable opportunities to invest these funds; Users of funds  are people or firms looking to make long-term investments and willing to  pay a price ( interest)  for the capital they borrow.   Financial Intermediaries Financial institutions that facilitate the process of funneling capital from holders of funds  to primary financial institutions to users of funds; Investment banks Mortgage originators Insurers Financial intermediaries Originate financial instruments (bonds, publicly traded equity, derivatives); Assume and manage risk The Theory of Efficient Markets The  efficient-market hypothesis (EMH)  asserts that financial markets are  "informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or  property, already reflect all known information. The efficient-market hypothesis states  that it is impossible to consistently outperform the market by using any information that 
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Lecture 8 - 9.17.2008 - AEM 1200: An Overview of the...

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