"Lec 5- Present Value Prices and the Real Rate of Interest" Financial Theory (ECON 251) Philosophers and theologians have railed against interest for thousands of years. But that is because they didn't understand what causes interest. Irving Fisher built a model of financial equilibrium on top of general equilibrium (GE) by introducing time and assets into the GE model. He saw that trade between apples today and apples next year is completely analogous to trade between apples and oranges today. Similarly he saw that in a world without uncertainty, assets like stocks and bonds are significant only for the dividends they pay in the future, just like an endowment of multiple goods. With these insights Fisher was able to show that he could solve his model of financial equilibrium for interest rates, present value prices, asset prices, and allocations with precisely the same techniques we used to solve for general equilibrium. He concluded that the real rate of interest is a relative price, and just like any other relative price, is determined by market participants' preferences and endowments, an insight that runs counter to the intuitions held by philosophers throughout much of human history. His theory did not explain the nominal rate of interest or inflation, but only their ratio. 00:00 - Chapter 1. Implications of General Equilibrium 03:08 - Chapter 2. Interest Rates and Stock Prices 22:06 - Chapter 3. Defining Financial Equilibrium 33:41 - Chapter 4. Inflation and Arbitrage 43:35 - Chapter 5. Present Value Prices 57:44 - Chapter 6. Real and Nominal Interest Rates Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses This course was recorded in Fall 2009.
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Lec 2- Utilities, Endowments, and Equilibrium
Lec 4- Efficiency, Assets, and Time
Lec 6 - Irving Fisher's Impatience Theory of Interest
Lec 7 - Shakespeare's Merchant of Venice and Collateral, Present Value and the Vocabulary of Finance
Lec 8 - How a Long-Lived Institution Figures an Annual Budget. Yield
Lec 10 - Dynamic Present Value
Lec 12 - Overlapping Generations Models of the Economy
Lec 13 - Demography and Asset Pricing: Will the Stock Market Decline when the Baby Boomers Retire?
Lec 14 - Quantifying Uncertainty and Risk
Lec 15 - Uncertainty and the Rational Expectations Hypothesis
Lec 16 - Backward Induction and Optimal Stopping Times
Lec 17 - Callable Bonds and the Mortgage Prepayment Option
Lec 18 - Modeling Mortgage Prepayments and Valuing Mortgages
Lec 19 - History of the Mortgage Market: A Personal Narrative
Lec 21 - Dynamic Hedging and Average Life
Lec 22 - Risk Aversion and the Capital Asset Pricing Theorem
Lec 23 - The Mutual Fund Theorem and Covariance Pricing Theorems
Lec 24 - Risk, Return, and Social Security
Lec 25 - The Leverage Cycle and the Subprime Mortgage Crisis