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April 29, 2011
In the first part of the lecture we wrap up the previous discussion of implied default probabilities, showing how to calculate them quickly by using the same duality trick we used to compute ...
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April 29, 2011
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 ...
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April 29, 2011
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 ...
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April 29, 2011
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 ...
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April 29, 2011
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 ...
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April 29, 2011
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 ...
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April 29, 2011
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 ...
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April 29, 2011
While economists didn’t have a good theory of interest until Irving Fisher came along, and didn't understand the role of collateral until even later, Shakespeare understood many of these ...
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April 29, 2011
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 ...
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April 29, 2011
Standard financial theory left us woefully unprepared for the financial crisis of 2007-09. Something is missing in the theory. In the majority of loans the borrower must agree on an interest rate ...
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April 29, 2011
Over time, economists' justifications for why free markets are a good thing have changed. In the first few classes, we saw how under some conditions, the competitive allocation maximizes ...
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April 29, 2011
This lecture explains what an economic model is, and why it allows for counterfactual reasoning and often yields paradoxical conclusions. Typically, equilibrium is defined as the solution to a ...
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April 29, 2011
This lecture addresses some final points about the CAPM. How would one test the theory? Given the theory, what’s the right way to think about evaluating fund managers' performance? ...
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April 29, 2011
Our understanding of the economy will be more tangible and vivid if we can in principle explain all the economic decisions of every agent in the economy. This lecture demonstrates, with two ...
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April 29, 2011
Until now we have ignored risk aversion. The Bernoulli brothers were the first to suggest a tractable way of representing risk aversion. They pointed out that an explanation of the St. Petersburg ...
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April 29, 2011
This lecture gives a brief history of the young field of financial theory, which began in business schools quite separate from economics, and of my growing interest in the field and in Wall ...
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April 29, 2011
This lecture reviews the intuition from the previous class, where the idea of dynamic hedging was introduced. We learn why the crucial idea of dynamic hedging is marking to market: even when ...
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February 14, 2011
The virtuous circle of housing price appreciation making defaults go down making lending lax making housing appreciate even more.
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February 14, 2011
How lower lending standards led to housing price inflation.
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February 14, 2011
Why did housing prices go up so much from 2000-2006 even though classical supply/demand would not have called for it.
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