Econ110BW11 - Lec7 A - GR_ol

Econ110BW11 - Lec7 A - GR_ol - Macroeconomics B Econ 110B...

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Macroeconomics B Econ 110B–Winter 2011 Prof. Giacomo Rondina Lecture 7
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Plan for Lecture 7 Stock Market and Stock Prices Stock Market and Economic Activity 2 Financial Markets and Expectations (Ch. 15)
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How to finance an economic activity (company)? Debt (Bonds) Equity (Stocks) 3 Financial Markets and Expectations (Ch. 15) Payments are determined at time of issuance. Payments depend on profits. STOCK: a contract giving the right to the beholder to claim the profits of the company that issued the contract (other rights included too).
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Terminology : Price of 1 Share (Stock) at t , Ex Dividend : Dividend Expected to be paid at t+1 per Share (Stock) : Expected Price of 1 Share (Stock) at t+1 , Ex Dividend 4 Financial Markets and Expectations (Ch. 15) $ t Q 1 $ e t D + 1 $ e t Q +
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No Arbitrage Pricing Investing $1 tt + 1 Bond Stock 5 N 1 Quantity of Bonds $1 $ B t P () 1 1 $ t B t Vi P =+ N Quantity of Stocks $ t Q 11 $$ ee DQ QQ + + + 1 1 $ t t i Q θ ++ + = : Equity Premium (in US is 5%)
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No Arbitrage Pricing Assumption: 6 Financial Markets and Expectations (Ch. 15) 11 1 $$ $ 1 ee tt t t DQ Q i θ + + + = ++ 0 θ= 1 $ 1 t t Q i + + + = +
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No Arbitrage Pricing 7 Financial Markets and Expectations (Ch. 15) 11 1 $$ $ 1 ee tt t t DQ Q i ++ + = +
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This note was uploaded on 01/18/2012 for the course ECON 101 taught by Professor Bansak during the Summer '07 term at San Diego State.

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Econ110BW11 - Lec7 A - GR_ol - Macroeconomics B Econ 110B...

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