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

2. Administrative Office Hours: 11am-12pm Tues/Thurs at 1900 Arlington Blvd; Suite C – Monroe Office: Room 262, 434-924-4054 – VNB Office: 1900 Arlington Blvd., Suite C, 212-731-2340 – Email: etb6d@virginia.edu – Student lunches almost every weekday Class Website: https://pages.shanti.virginia.edu/ETB_Website/students- alums/class-pages/econ-4340-fall-2015/https://pages.shanti.virginia.edu/ETB_Website/students- 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

3. 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

4. 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

5. 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

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

7. The Early Years August 25, 2015

8. The Early Years August 25, 2015 381.17 Sep. 3 rd, 1929 40.94 May 26 th, 1896

9. The Great Crash of 1929 August 25, 2015

10. The Great Crash of 1929 41.22 Jul. 8 th, 1932 August 25, 2015 381.17 Sep. 3 rd, 1929

11. The Thirties in Review August 25, 2015

12. The Thirties in Review August 25, 2015 381.17 Sep. 3 rd, 1929 41.22 Jul. 8 th, 1932 192.91 Mar. 3 rd, 1937 155.92 Sep. 12 th, 1939

13. 1939 to 1966 August 25, 2015

14. 1939 to 1966 – 155.92 Sep. 12 th, 1939 725.76 Aug. 22 th, 1961 536.98 Jun. 27 th, 1962 954.73 Apr. 21 th, 1966 August 25, 2015

15. 631.16 May 26 th, 1970 1966 to 1981

16. 954.73 Apr. 21 st, 1966 774.88 Sep. 8 th, 1966 1036.27 Dec. 11 th, 1972 584.56 Oct. 4 th, 1974 1007.42 Jun. 11 th, 1981 August 25, 2015 631.16 May 26 th, 1970 1966 to 1981 – Fifteen year period with no growth

17. 1981 to 2000 August 25, 2015

18. Peak in April 2000 11,287 April 11 th, 2000 1981 to 2000 – Boom in the stock market August 25, 2015

19. 1987

20. August 25, 2015 1,927 Jan. 2 nd, 1987 2,722 Aug. 25 th, 1987 2,246 Oct. 16 th, 1987 1,738 Oct. 19 th, 1987 1,938 Dec. 31 st, 1987 1987 – The “Rip van Winkle” year

21. Since 2000 13,950 Jul. 16 th, 2007 6,547 Mar. 9 th, 2009 17,113 Jul. 22 nd, 2014 August 25, 2015

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

23. Inflation and Interest Rates Peaked in 1979-81 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

24. 5.03% Feb. 1 st, 2007 16.30% May 1 st, 1981 Fixed income rates have been declining since 80’s August 25, 2015

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

26. Inflation has been stable since 80’s August 25, 2015 14.40% 1947 13.50% 1980 1.50% 2013

27. August 25, 2015