Contemporary Finance

Money, Risk, and Public Policy

Inbunden, Engelska, 2024

Av Allan M. Malz, Allan M. (Columbia University) Malz, Allan M Malz

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A clear new finance textbook that explains essential models and practices, and how the financial world works nowContemporary Financial Markets and Institutions: Tools and Techniques to Manage Risk and Uncertainty is an ideal introduction to finance for professionals and students. It covers the basic finance theory required to understand the contemporary financial world and builds on it to present finance in a detailed yet comprehensible way. It explains markets and institutions, and the central bank and government policies that influence how they operate.The book begins with an overview of basic finance theory, including investments, asset return behavior, derivatives pricing, and credit risk. It discusses topics that have dominated markets in recent decades, such as extreme events, liquidity, currency and debt crises, and radical changes in monetary policy and regulation. The concepts are presented alongside examples, strange market episodes, and data from recent experience. Contemporary Financial Markets and Institutions covers advanced credit topics like securitization in a straightforward, succinct way, without advanced mathematics, but with detailed examples using real market data. It integrates financial and macroeconomic content seamlessly. The book is suitable for use by undergraduate and graduate students, and by practitioners of all backgrounds. Abundant pedagogical resources in the book and online facilitate teaching.This book will help students and practitioners: Learn the basic concepts and models in finance, including investment, asset pricing, uncertainty and risk, monetary policy and the regulatory systemExplore recent developments, from the expansion of central banks to the chaos in commercial banking to changes in financial technology, that are dominating markets worldwideGain knowledge of risk types, models, and measurement methods, and the impact of regulationPrepare yourself for a successful career in finance, or update your existing knowledge base with this comprehensive reference guideIdeal as a sole or supplementary textbook for beginning and advanced finance courses, as well as for practitioners in finance-related fields, this book takes a unique, market-focused approach that will serve readers well in our turbulent and puzzling times.

Produktinformation

Utgivningsdatum2024-11-11
Mått185 x 262 x 28 mm
Vikt816 g
FormatInbunden
SpråkEngelska
SerieWiley Finance
Antal sidor432
FörlagJohn Wiley & Sons Inc
ISBN9781394179626

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Finansiering inom Ekonomi och ledarskap

Allan M. Malz has been chief risk officer at several multi-strategy hedge fund management firms. He worked at the Federal Reserve Bank of New York as a researcher and foreign exchange trader, and helped implement the Fed's emergency liquidity programs addressing the global financial crisis.Malz is an investment consultant and adjunct professor at Columbia University, and the author of Financial Risk Management: Models, History, and Institutions. His work on predicting financial crises and on risk measurement for options has been published in industry and academic journals. He holds a Ph.D. from Columbia and a Diplom from Ludwig-Maximilians-Universität München.

List of Figures xiiiList of Tables xviiPreface xixAbout the Author xxiPart I Finance in the Economic System 11 Functions and Structure of the Financial System 31.1 Functions of the Financial System 31.2 Market Participants, Intermediaries, and Governments 41.3 Assets and Markets 61.3.1 Money and Money Markets 61.3.2 Foreign Exchange 71.3.3 Digital Currencies 71.3.4 Equity, Loans, and Bonds 71.3.5 Spot and Derivative Assets 91.3.6 Alternative Investments 111.4 Mechanics of Trading 121.4.1 Asset Positions and Risk Exposures 121.4.2 Market Microstructure 141.4.3 Payment Systems 151.4.4 Clearing and Settlement 16Further Reading 172 Asset Returns and Risk 192.1 Asset Returns and Interest Rates 192.1.1 Measuring Asset Returns 192.1.2 Interest Rates and Yield Curves 222.1.3 Total Returns and Asset Values 252.1.4 Inflation and Real Returns 262.1.5 Excess Returns 292.2 Asset Return Probability Distributions 302.3 Financial Risks 322.3.1 Market Risk 322.3.2 Credit Risk 332.3.3 Operational Risks 34Further Reading 353 Information, Preferences, and Asset Prices 373.1 Information and the Quantification of Risk 373.1.1 Conceptions of Equilibrium 373.1.2 Technical Progress 393.1.3 Frictions and Transaction Costs 403.1.4 Institutions 413.2 Risk Premiums 423.2.1 The Convention of the Risk-Free Rate and Reference Rates 423.2.2 Expected Returns and Risk Premiums 433.2.3 Interest Rate Spreads 463.3 An Era of Low Interest Rates and Slowing Growth 483.3.1 Safe Assets 523.3.2 Rising Debt 54Further Reading 55Part II Markets, Uncertainty, and Risk 574 The Behavior of Asset Returns over Time 594.1 Standard Model of Asset Price Behavior and Reality 594.2 Return, Volatility, and Correlation Behavior 614.2.1 Return Predictability 614.2.2 Time Variation in Return Volatility 624.2.3 Time Variation in Return Correlation 624.3 Volatility Forecasting 644.3.1 Simple Approaches to Volatility Estimation 644.3.2 The GARCH Model 664.3.3 The Exponentially Weighted Moving Average Model 674.4 Tail Risk: the Prevalence of Extremes 704.4.1 Extreme Asset Returns 704.4.2 Skewness and Kurtosis 724.4.3 Clues to Financial Puzzles in the Behavior of Volatility 73Further Reading 755 Capital Markets: How Asset Prices Are Determined 775.1 Portfolios, Diversification, and Investor Choice 775.1.1 Portfolio Risk 775.1.2 Optimal Investor Choice 805.2 The Capital Asset Pricing Model 825.2.1 The Efficiency of the Market Portfolio 835.2.2 Estimating Systematic and Nonsystematic Risk 845.2.3 More General Factor Models 86Further Reading 876 Derivatives Values and Risks 896.1 Futures, Forwards, and Swaps 896.1.1 Forward Foreign Exchange Markets 916.1.2 Valuation of Interest Rate Swaps 946.1.3 The LIBOR Transition 956.1.4 Credit Default Swaps 966.2 Options 986.2.1 Option Values 986.2.2 The Option-Implied Volatility Surface 1016.2.3 Option Risks 1026.2.4 Put-Call Parity 1046.2.5 Interest Rate Implied Volatility 1046.3 Market-Implied Asset Price Forecasts 1056.3.1 Risk-Neutral Mean Forecasts 1056.3.2 Risk-Neutral Volatility and Correlation Forecasts 1076.3.3 Risk-Neutral Probability Distributions 107Further Reading 1097 Capital Market Efficiency 1117.1 Asset Price Behavior in an Efficient Market 1117.1.1 Validating the Efficient Markets Hypothesis 1127.1.2 Market Efficiency, Preferences, and Knowledge 1137.2 Apparent Violations of Market Efficiency 1147.2.1 Slow Arbitrage 1147.2.2 Basis Spreads 1157.2.3 Foreign Exchange Markets 1167.3 Efficacy of Active Management 1177.3.1 Passive and Active Investment Management 1177.3.2 Empirical Validation of Active Management 1187.3.3 Alternative Investments 122Further Reading 1268 Market Risk 1298.1 Definition of Value-at-Risk 1298.1.1 Why Value-at-Risk? 1298.1.2 Value-at-Risk Is a Quantile 1308.2 Computing Value-at-Risk for One Risk Factor 1308.2.1 Modeling Approaches to Value-at-Risk Estimation 1308.2.2 Parametric Normal Value-at-Risk 1338.2.3 Computing Value-at-Risk via Monte Carlo Simulation 1348.2.4 Computing Value-at-Risk via Historical Simulation 1348.2.5 Value-at-Risk for Short Positions 1368.2.6 Comparison of Value-at-Risk Computation Approaches 1388.3 Nonlinear Market Risks 1388.3.1 Nonlinearity and Risk Measurement 1388.3.2 Applying Delta-Gamma Value-at-Risk to the Value of an Option 1398.3.3 Portfolio Value-at-Risk 1418.4 Incorporating Extreme Events Into Risk Measurement 1428.4.1 Why Not Value-at-Risk? 1428.4.2 Stress Testing and Scenario Analysis 1438.4.3 Expected Shortfall 145Further Reading 1489 Credit and Counterparty Risk 1499.1 Default, Bankruptcy, and Resolution 1499.1.1 Equity, Debt, and Leverage 1499.1.2 Information Costs in Credit Intermediation 1509.1.3 Default and Migration 1519.1.4 Counterparty Risk, and Collateral 1529.1.5 Bankruptcy, Capital Structure, and Resolution 1539.2 Quantifying Credit Risk 1559.2.1 Credit Risk Metrics 1559.2.2 Default Modeling 1569.2.3 Intensity Models and Default Time Analytics 1579.3 Single-Obligor Credit Risk Models 158Further Reading 162Part III Market Institutions and Risk Assessment 16310 Interest Rate Risk 16510.1 Sources of Interest Rate Risk 16510.2 Interest Rate Risk Measurement 16710.2.1 Measuring Bond Price Sensitivity to Rates 16710.2.2 Duration and Convexity 16910.2.3 Convexity and the Mortgage-Backed Securities Markets 17110.2.4 Measuring Value-at-Risk for a Bond Position 175Further Reading 17611 Leverage 17711.1 Defining and Measuring Leverage 17711.1.1 Company Financing 17711.1.2 Corporate Finance Policy 17811.1.3 Margin and Haircuts 17911.2 Attractiveness of Leverage and Reaching for Yield 17911.3 Leveraged Trades 18011.3.1 Carry Trades 18111.3.2 Leveraged Investment Funds 18411.4 Incentive Alignment and Capital Structure 18411.4.1 Leverage and Incentives to Risk Shifting 18411.4.2 Debt Overhang 186Further Reading 18712 Liquidity 18912.1 Funding and Market Liquidity Risk 18912.1.1 Market Liquidity 18912.1.2 Market Liquidity Stress Events 19112.1.3 Funding Liquidity 19212.2 Private Liquidity Creation: Commercial Banking 19312.2.1 Historical Emergence of Banks 19312.2.2 Commercial Bank Liquidity Creation 19412.2.3 Commercial Bank Risks 19512.3 Private Liquidity Creation: Short-Term Funding 19812.3.1 Structure of Collateralized Securities Lending Markets 19912.3.2 Repo Markets 20112.3.3 Money Market Mutual Funds 204Further Reading 20613 Portfolio Credit Risk 20713.1 Credit Portfolios and Default Correlation 20713.1.1 Challenges in Portfolio Credit Risk Modeling 20713.1.2 Default Correlation 20913.1.3 Granularity and Uncorrelated Portfolios 21013.1.4 Granularity, Subadditivity, and Credit Value-at-Risk 21213.2 Measuring Portfolio Credit Risk 21313.2.1 Single Factor Credit Risk Model 21313.2.2 Single Factor Model for Portfolios 21613.2.3 Portfolio Credit Value-at-Risk 219Further Reading 22314 Securitization and Structured Product Risk 22514.1 Introduction to Securitization 22514.1.1 Function and Design of Securitization 22514.1.2 Securitization in the United States 22614.2 Securitization Structure 22814.3 Credit Risk Measurement of Securitizations 23114.3.1 Securitization Loss Scenarios 23114.3.2 Securitization Risk Modeling 23314.3.3 Credit Value-at-Risk of Securitizations 23714.3.4 Risk Analysis and Structuring of Securitizations 23814.4 Credit Correlation Trading 24014.4.1 CDS Indexes and Standard Tranches 24014.4.2 The 2005 Auto Industry Credit Crisis and the “London Whale” 241Further Reading 24415 Financial Instability and Financial Crises 24515.1 Defining Financial Crises 24515.2 Runs and Liquidity in Financial Crises 24615.3 Causes of Financial Crises 25115.3.1 Interest Rates, Volatility, and Financial Imbalances 25115.3.2 Long-Term Liabilities and Interest Rates 25315.3.3 Reaching for Yield 25415.4 International Financial Imbalances 25815.4.1 Rising International Trade and Global Debt 25815.4.2 The Role of the US Dollar 26015.4.3 The Cross-Currency Basis 26315.4.4 International Financial Imbalances and Stability 264Further Reading 268Part IV Monetary and Regulatory Policy 26916 Overview of Financial Regulation 27116.1 Structure of Financial Regulation 27116.1.1 Financial Regulatory Authorities 27116.1.2 Law and Regulation 27216.2 Methods of Regulation 27316.2.1 Bank Supervision 27416.2.2 Regulatory Developments of Recent Decades 27516.3 Purposes and Efficacy of Financial Regulation 27616.3.1 Rationale of Financial Regulation 27616.3.2 Information Problems in Regulation 27716.3.3 Incentives and the Efficacy of Regulation 279Further Reading 28117 Monetary Policy 28317.1 The Emergence of Monetary Policy 28317.2 The Framework of Monetary Policy 28417.2.1 Policy Targets and Instruments 28517.2.2 Credibility of Monetary Policy 28617.2.3 Money Supply Control 28717.2.4 Interest Rate Control 28917.2.5 The New Keynesian Framework 28917.2.6 Alternative Approaches to Monetary Policy 29117.3 Monetary Operations in Normal Times 292Further Reading 29618 Regulation for Financial Stability 29718.1 The Lender of Last Resort Function 29718.1.1 Bagehot’s Rule 29718.1.2 Market Maker of Last Resort 29818.1.3 Credit Support and Liquidity Support 29918.2 The Onset of the Global Financial Crisis 30018.3 Financial Stability Policy 30218.3.1 Financial Stability and Monetary Policy 30218.3.2 Financial Stability Monitoring 30418.4 The Problem of Public-Sector Guarantees 30418.4.1 Deposit Insurance 30518.4.2 Regulation of Money Market Mutual Funds 30518.4.3 Too Big to Fail 30718.4.4 Emergence of a Too Big To Fail Policy 30718.4.5 The Too Big to Fail Subsidy and its Cost 30818.4.6 Too Big to Fail and the Regulatory System 309Further Reading 30919 Regulation of Capital Funding, Liquidity, and Large Banks 31119.1 Historical Background of the Capital Standards 31119.2 Bank Accounting Standards and Regulation 31219.2.1 Treatment of Losses 31219.2.2 The Banking and Trading Books 31419.3 Measuring Risk-Weighted and Adjusted Assets 31519.3.1 Risk-Weighted Assets 31519.3.2 Leverage Exposure 31719.4 Quality and Quantity of Capital 31719.4.1 Quality of Capital 31819.4.2 Quantity of Capital 31819.4.3 Effectiveness and Market Impact of Capital Regulation 31919.5 Regulation of Large Banks 32119.5.1 Regulatory Capital Ratios for Large Banks 32119.5.2 Bail-in-able Liabilities 32219.5.3 Regulatory Stress Tests 32319.5.4 Resolution of Large Banks 32519.5.5 Regulatory Liquidity Standards for Banks 328Further Reading 33120 Monetary Policies Since the Global Financial Crisis 33320.1 The Monetary Policy Response to the Global Financial Crisis 33320.1.1 Interest on Reserves 33320.1.2 Quantitative Easing 33420.1.3 Forward Guidance 33520.2 Monetary Operations with a Large Balance Sheet 33720.2.1 Quantitative Easing and the Soggy Money Market 33820.2.2 The Ample Reserves Operating Framework 34020.2.3 The Impact of Exit on Funding and Market Liquidity 34320.2.4 Money Markets in September 2019 34420.3 The Liquidity Paradox and the Banking Turmoil 34620.3.1 The Public-Sector Response to the Covid Pandemic 34620.3.2 The Rise in Interest Rates and the Financial System 34920.3.3 The 2023 US Bank Panic 351Further Reading 354Appendix 357A Much of the Probability and Statistics You Need 359A1 Probability Distributions and Their Properties 359A.1.1 Moments of a Distribution 359A.1.2 Quantiles of a Distribution 360A.2 Important Distributions 360A.2.1 Binomial Distribution 361A.2.2 Poisson Distribution 361A.2.3 Normal Distribution 361A.2.4 Multivariate Distributions 362A.3 Stochastic Processes 363A.4 Statistical Tests 365A.4.1 Samples 365A.4.2 Sample Moments 365A.4.3 Quantiles of Samples 366A.4.4 Central Limit Theorem 367A.4.5 Hypotheses 367A.4.6 Test Statistics 368A.5 Linear Regression Analysis 368Further Reading 370B Notation 371C Abbreviations 373References 377Index 395