Financial Markets 2011 Robert Shiller

As the starting point for this lecture, Professor Shiller contrasts the view of economics as the theory of the allocation of scarce resources with the view of economics as the study of exchange. After a discussion of the difference between brokers and dealers, he outlines the history of securities exchanges from ancient Rome, to the Amsterdam Stock Exchange and Jonathan’s Coffee House in London, until the formation of the New York Stock Exchange. He complements this historic account with an overview of securities exchanges all over the world, covering India, China, Brazil, and Mexico. An example of a limit order book allows him to elaborate on the mechanics of trading at the National Association of Securities Dealers Automatic Quotation System (NASDAQ). Subsequently, he turns his attention to the growing importance of program trading and high frequency trading, but also discusses their impact on the stock market crash from October 19, 1987, as well as on the Flash Crash from May 6, 2010. When talking about fairness in financial markets, particularly with regard to the relation between private investors and brokers, he discusses the National Market System (NMS), the Intermarket Trading System (ITS), and consolidated quotation systems. He concludes this lecture with some reflections on the operations of dealers, addressing the role of inside information and the Gambler’s Ruin problem.

Complete course materials are available at the Open Yale Courses website: http://oyc.yale.edu

This course was recorded in Spring 2011.

After reviewing the main themes of this course, Professor Shiller shares his views about finance from a broader perspective. His first topic, the morality of finance, centers on Peter Unger’s Living High and Letting Die and William Graham Sumner’s What the Social Classes Owe Each Other. Subsequently, he addresses the hopelessness about the world’s future that some see from Malthus’ dismal law from the Essay on the Principle of Population, but contrasts it with a positive outlook on purposes and goals in life. While discussing the endurance and survival of financial contracts, he outlines the cases of Germany after World War I, Iran after the Islamic Revolution, and South Africa after the end of apartheid, in which financial contracts prevailed, but does not fail to mention the cases of Russia after the Russian Revolution and Japan after World War II, in which it has not been the case. After a brief comparison between Mathematical Finance and Behavioral Finance, he elaborates on the interplay between wealth and inequality, building on Jacob Hacker’s and Paul Pearson’s Winner-Take-All Politics, Karl Marx’s Das Kapital, and Robert K. Merton concept of the cosmopolitan class. Following this, he emphasizes the democratization of finance as an important future trend and provides examples for this process from his books The Subprime Solution,The New Financial Order and Finance and the Good Society. Professor Shiller concludes the course with advice for finding the right career, highlighting the role of random events, but also the importance of a long-horizon outlook and an orientation towards history in the making.

Complete course materials are available at the Open Yale Courses website: http://oyc.yale.edu

This course was recorded in Spring 2011.

As an introduction to public and nonprofit finance, Professor Shiller reflects on the remarkable financial structures that we have in support of public causes, making possible the achievement of higher goals that transcend individual satisfaction of needs. He gives examples of nonprofits, illustrating how that financial form can support a moral mission and social purpose. There is however sometimes a fine line between for-profit and public enterprises, because similar companies can be either for-profit or non-profit and because governments regulate and collect corporate profits taxes on for profit-organizations, implicitly creating a public purpose for them. Subsequently, he covers state and local finance, outlining the difference between operating budgets and capital budgets as well as the tax-exemption of municipal bonds. During the last part of the lecture, he provides an overview of historic improvement in governmental social insurance that ranges from progressive taxes to public services and to old age, survivors, and disability insurance. All of these advances in public and nonprofit finance have taken place in step with other advances in human society, notably advances in information technology.

Complete course materials are available at the Open Yale Courses website: http://oyc.yale.edu

This course was recorded in Spring 2011.

After introducing the core terms and main ideas of options in the beginning of the lecture, Professor Shiller emphasizes two purposes of options, a theoretical and a behavioral purpose. Subsequently, he provides a graphical representation for the value of a call and a put option, and, in this context, addresses the put-call parity for European options. Within the framework of the Binomial Asset Pricing model, he derives the value of a call-option from the no-arbitrage-principle, and, as a continuous-time analogue to this formula, he presents the Black-Scholes Option Pricing formula. He contrasts implied volatility, as represented by the VIX index of the Chicago Board Options Exchange, which uses a different formula in the spirit of Black-Scholes, with the actual S&P Composite volatility from 1986 until 2010. Professor Shiller concludes the lecture with some thoughts about options on single-family homes that he launched with his colleagues of the Chicago Mercantile Exchange in 2006.

Complete course materials are available at the Open Yale Courses website: http://oyc.yale.edu

This course was recorded in Spring 2011.

Professor Shiller argues that institutional investors are fundamentally important to our economy and our society. Following his thoughts about societal changes in a modern and capitalist world, he turns his attention to the fiduciary duties of investment managers. He emphasizes the “prudent person rule,” and critically reflects on the limitations that these rules impose on investment managers. Elaborating on different forms of institutional money management, he covers mutual funds, contrasting the legislative environments in the U.S. and Europe, and trusts. In the treatment of the next form, pension funds, he starts out with the history of pension funds in the late 19th and the first half of the 20th century, and subsequently presents the legislative framework for pension funds before he outlines the differences of defined benefit and defined contribution plans. Professor Shiller finishes the list of forms of institutional money management with endowments, focusing on investment mistakes in endowment management, as well as family offices and family foundations.

Complete course materials are available at the Open Yale Courses website: http://oyc.yale.edu

This course was recorded in Spring 2011.

Professor Shiller characterizes investment banking by contrasting it to consulting, commercial banking, and securities trading. Then, in order to see the essence of investment banking, he reviews some of the principles that John Whitehead, the former chairman of Goldman Sachs, has formulated. These principles are the basis for a discussion of the substantial power that investment bankers have, and their role in society. Government regulation of these powerful investment banks has been a thorny issue for many years, and especially so now since they played a significant role in world financial crisis of the 2000s.

Complete course materials are available at the Open Yale Courses website: http://oyc.yale.edu

This course was recorded in Spring 2011.