The most comprehensive educational resources for finance

Quantifying Uncertainty and Risk

Until now, the models we’ve used in this course have focused on the case where everyone can perfectly forecast future economic conditions. Clearly, to understand financial markets, we have to incorporate uncertainty into these models. The first half of this lecture continues reviewing the key statistical concepts that we’ll need to be able to think

Will the Stock Market Decline when the Baby Boomers Retire?

In this lecture, we use the overlapping generations model from the previous class to see, mathematically, how demographic changes can influence interest rates and asset prices. We evaluate Tobin’s statement that a perpetually growing population could solve the Social Security problem, and resolve, in a surprising way, a classical argument about the link between birth

Overlapping Generations Models of the Economy

In order for Social Security to work, people have to believe there’s some possibility that the world will last forever, so that each old generation will have a young generation to support it. The overlapping generations model, invented by Allais and Samuelson but here augmented with land, represents such a situation. Financial equilibrium can again

Financial Implications of US Social Security System

This lecture continues the analysis of Social Security started at the end of the last class. We describe the creation of the system in 1938 by Franklin Roosevelt and Frances Perkins and its current financial troubles. For many democrats Social Security is the most successful government program ever devised and for many Republicans Social Security

Dynamic Present Value

In this lecture we move from present values to dynamic present values. If interest rates evolve along the forward curve, then the present value of the remaining cash flows of any instrument will evolve in a predictable trajectory. The fastest way to compute these is by backward induction. Dynamic present values help us understand the

Economic Indicators – Unemployment Rate

This video talks about unemployment rate, which is one of the important economic indicators. The video discusses what unemployment rate is, it’s various characteristics, and how it affects financial markets.

Yield Curve Arbitrage

Where can you find the market rates of interest (or equivalently the zero coupon bond prices) for every maturity? This lecture shows how to infer them from the prices of Treasury bonds of every maturity, first using the method of replication, and again using the principle of duality. Treasury bond prices, or at least Treasury

How a Long-Lived Institution Figures an Annual Budget Yield

In the 1990s, Yale discovered that it was faced with a deferred maintenance problem: the university hadn’t properly planned for important renovations in many buildings. A large, one-time expenditure would be needed. How should Yale have covered these expenses? This lecture begins by applying the lessons learned so far to show why Yale’s initial forecast

Irving Fisher’s Impatience Theory of Interest

Building on the general equilibrium setup solved in the last week, this lecture looks in depth at the relationships between productivity, patience, prices, allocations, and nominal and real interest rates. The solutions to three of Fisher’s famous examples are given: What happens to interest rates when people become more or less patient? What happens when