Economics 434: The Theory of Financial Markets Professor Burton Fall 2015 August 25, 2015

Administrative Office Hours: 11am-12pm Tues/Thurs at 1900 Arlington Blvd; Suite C – Monroe Office: Room 262, – VNB Office: 1900 Arlington Blvd., Suite C, – – Student lunches almost every weekday Class Website: alums/class-pages/econ-4340-fall-2015/ alums/class-pages/econ-4340-fall-2015/ Syllabus posted on site with required readings – Additional course material to be posted here (textbook chapters, etc.) Students are responsible for: – All lectures including powerpoint slides and all lecture content – All readings; no exceptions August 25, 2015

Course Overview – 3 main topics covered Debt and Equity Markets Modern Portfolio Theory Leverage, Corporate Balance Sheets, Buyouts See me for any questions/concerns (especially transfer students) August 25, 2015

Grading Policy First midterm (30%) – Thursday, October 1st Second midterm (30%) – Thursday, November 12th Final (40%) – Friday, December 18th, 2pm - 5pm – Grades on each exam adjusted against the mean – Grade distribution is roughly 1/3 A’s, 1/3 B’s, 1/3 C’s (can be D’s or F’s though) – Absolute grade does not matter e.g. could make a C with a 90 average There is no “Dutch knockout” – you must take all exams Honor System applies to all graded assignments/exams Conscientious Retraction Option August 25, 2015

2 main readings used in this class “A Random Walk Down Wall Street”, Malkiel “Theory of Financial Markets”, Burton – $30 when and if available – Otherwise look for notes on the course website August 25, 2015

For today: A brief history of financial markets… August 25, 2015 Began on May 26 th 1896 at: 40.94

The Early Years August 25, 2015

The Early Years August 25, Sep. 3 rd, May 26 th, 1896

The Great Crash of 1929 August 25, 2015

The Great Crash of Jul. 8 th, 1932 August 25, Sep. 3 rd, 1929

The Thirties in Review August 25, 2015

The Thirties in Review August 25, Sep. 3 rd, Jul. 8 th, Mar. 3 rd, Sep. 12 th, 1939

1939 to 1966 August 25, 2015

1939 to 1966 – Sep. 12 th, Aug. 22 th, Jun. 27 th, Apr. 21 th, 1966 August 25, 2015

May 26 th, to 1981

Apr. 21 st, Sep. 8 th, Dec. 11 th, Oct. 4 th, Jun. 11 th, 1981 August 25, May 26 th, to 1981 – Fifteen year period with no growth

1981 to 2000 August 25, 2015

Peak in April ,287 April 11 th, to 2000 – Boom in the stock market August 25, 2015

1987

August 25, ,927 Jan. 2 nd, ,722 Aug. 25 th, ,246 Oct. 16 th, ,738 Oct. 19 th, ,938 Dec. 31 st, – The “Rip van Winkle” year

Since ,950 Jul. 16 th, ,547 Mar. 9 th, ,113 Jul. 22 nd, 2014 August 25, 2015

From Peak to Calamity August 25, 2015 Dow Jones Industrial Average May 19 Aug 18 Aug 24 Close 18,312 17,511 15,871

Inflation and Interest Rates Peaked in Secular, long-term decline since then Now – Inflation around 2 percent – Short term rates barely above zero – Ten year yields around 2.5 percent – Thirty year yields around 3.25 percent August 25, 2015

5.03% Feb. 1 st, % May 1 st, 1981 Fixed income rates have been declining since 80’s August 25, 2015

15.32% Sep. 1 st, 1981 On the tail end of the fixed income decline in rates August 25, 2015

Inflation has been stable since 80’s August 25, % % % 2013

August 25, 2015