econ423lec5

econ423lec5 - 6/24/2009 The Plan for Today Shifts in Bond...

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6/24/2009 1 ASSET PRICING, PART II JUNE 24 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today b Shifts in Bond Supply b Case Studies in Asset Demand b Commodity Markets: The Case of Gold b Risk Structure of Interest Rates b Homework Quiz Distribution Recall from last time… b Factors that shift the bond demand curve 1. Wealth/saving b Effects of a business cycle expansion 2. Expected Returns on Bonds b Expected Future Interest Rates b Expected Inflation 3. Riskiness of bonds relative to other assets 4. Bond liquidity relative to other assets Shifts in Bond Supply b Factors that shift the bond supply curve include: 1. Profitability of Investment Opportunities b In a business cycle expansion, investment opportunities increase, leading to an increased supply of bonds in an attempt to finance them. 2. Expected Inflation b Decreased real costs of borrowing 3. Government Spending b The “crowding out” of government deficit spending results in an increased supply of bonds Cases in Asset Demand b The Fisher Effect - How does the bond market react to a change in expected inflation? Quantity of Bonds ($, Billions) Price ($) $950 (i=5.3%) $850 (i=17.6%) $750 (i=33.0%) 100 300 500 b Changes in Bond Demand Cases in Asset Demand b The Fisher Effect - How does the bond market react to a change in expected inflation? b Changes in Bond Demand b Changes in Bond Supply Quantity of Bonds ($, Billions) Price ($) $950 (i=5.3%) $850 (i=17.6% ) $750 (i=33.0% ) 100 300 500
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6/24/2009 2 Cases in Asset Demand b The Fisher Effect - How does the bond market react to a change in expected inflation? b Changes in Bond Demand b Changes in Bond Supply b Market Equilibrium Quantity of Bonds ($, Billions) Price ($) $950 (i=5.3%) $850 (i=17.6% ) $750 (i=33.0% ) 100 300 500 New Market Equilibrium Cases in Asset Demand b Evidence of the Fisher Effect in the United States Cases in Asset Demand b The Effects of a Business Cycle Expansion b Changes in Bond Demand Quantity of Bonds ($, Billions)
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econ423lec5 - 6/24/2009 The Plan for Today Shifts in Bond...

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