1 / 43

Basics for market microstructure

Basics for market microstructure Stock market is a slough of fear and greed untethered to corporate realities – Warren Buffet What is finance? Capital markets Portfolio management Asset pricing Time and cross dimensions Risk management Financial engineering Performance evaluation

Audrey
Télécharger la présentation

Basics for market microstructure

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Basics for market microstructure Stock market is a slough of fear and greed untethered to corporate realities – Warren Buffet

  2. What is finance? • Capital markets • Portfolio management • Asset pricing • Time and cross dimensions • Risk management • Financial engineering • Performance evaluation • Market microstructure MM 2006/7

  3. What is finance? • Corporate finance • Capital budgeting • Project valuation • Capital structure • Mergers and acquisitions • Company valuation • Going private / public (IPO) • Corporate governance MM 2006/7

  4. Potential employer / job function • Investment bank • Corporate finance: help companies to raise capital • M&A: value companies, structure deals, negotiate • Trading equity, FI, FX, derivatives • Structured finance: create new instruments • Analyst / research • Commercial bank • Loans to individuals and companies • Mortgage • Private banking MM 2006/7

  5. Potential employer / job function • Money management: mutual / pension / hedge funds • Portfolio manager: select investments • Investment advisor • Analyst • Corporate finance dept in a company • Audit company MM 2006/7

  6. Market microstructure • Financial markets • Financial instruments • Financial intermediaries MM 2006/7

  7. Financial markets • Primary vs secondary • Exchanges vs OTC • Dealership vs (batch / continuous) auction • Listing/Depositary receipts MM 2006/7

  8. Financial markets • Objective: facilitate trading to allow • Money transfer over time • Risk sharing • Price discovery • Issues: transaction costs • Info asymmetry • Liquidity • Informational efficiency MM 2006/7

  9. Financial instruments • Basic: stocks and bonds • Derivatives: forwards, futures, options, swaps, etc. • Indices MM 2006/7

  10. Financial instruments • Objectives • Marketable • Give specific payoff in a given state of the nature • Issues • Specifics vs liquidity/ simplicity • Counterparty risk • Bad incentives MM 2006/7

  11. Financial intermediaries • Brokers / dealers • Commercial banks • Investment banks • Mutual / pension / hedge funds • Wealth management MM 2006/7

  12. Financial intermediaries • Objectives • Minimize transaction costs • Economies of scale • Solve information problems • Brokerage vs qualitative asset transformation • Issues • Agency problem • Coordination • Conflict of interest MM 2006/7

  13. Jargon • Short sales • Spread • Insider • Market-maker • Listing • Liquidity • Securitization • Market efficiency • Arbitrage MM 2006/7

  14. Books MM 2006/7

  15. Further courses • Investment theory • Corporate finance • Econometrics of financial markets • Risk management MM 2006/7

  16. Lecture 2: plan • Prices and returns • Why is the discount rate positive? • Index models and CAPM • Specifics of corporation • Stocks vs bonds • Financial statements and coefficients MM 2006/7

  17. Prices and returns -Why do prices rise? - Because there are more buyers than sellers!

  18. Prices and returns • How to define returns? • for stocks / bonds • Why usually employ returns in models? • Why need stochastics? • How to account for transaction costs? MM 2006/7

  19. Discount rate • Time preference • Inflation • Risk MM 2006/7

  20. Models The one investment certainty is that we are all frequently wrong

  21. Index models • Market model: Ri,t = αi + βiRM,t + εi,t, • where E(εi,t)=0, cov(RM, εi)=0 • Risk management: ΔRi ≈ βiΔRM • Separation of total risk on systematic and idiosyncratic: var(Ri)=βi2σ2M+σ2(ε)i • Systematic risk depends on factor exposures (betas): βi2σ2M • Idiosyncratic risk can be reduced by diversification • Covariance matrix: cov(Ri, Rj) = βiβjσ2M • Assuming E(εiεj)=0 for i≠j MM 2006/7

  22. CAPM • More restrictive model: E[Ri,t-RF,t] = βiE[RM,t-RF,t] • where E(εi,t)=0, cov(RM, εi)=0 • The expected excess return of each asset is proportional to its beta • Investors require higher expected returns on assets with higher systematic risk • In the equilibrium, everybody invests in the market portfolio (of risky assets) and risk-free rate MM 2006/7

  23. Мифы / Стереотипы «Количественные модели объективны» «Чем сложнее модель, тем лучше» «Количественные модели могут дать точный прогноз» «Модели дают прогноз и расчет стоимости компании раз и навсегда» MM 2006/7

  24. Specifics of corporation The most investor can lose is everything?

  25. Forms of Business Organization • Sole proprietorship • Partnership • Corporation Evaluate by • The life of the entity • The ability to raise capital • The owners' liability MM 2006/7

  26. Modern Corporation • Advantages • Limited liability • 1811: general act of incorporation in NY • Easy transfer of ownership • Unlimited life • Ability to raise large amounts of money MM 2006/7

  27. Modern Corporation • Disadvantages • Start-up can be costly • Earnings subject to double taxation • The agency problem • Separation of control and ownership • The leverage effect of debt MM 2006/7

  28. Equity vs Debt • Shareholders • Control rights (e.g., elect directors) • Limited liability • Residual claim on assets (after paying up liabilities) • Dividends (fully taxable) • Debtholders • Fixed contractual claim against the corporation • No voting power unless the debt is not paid • Interest on debt is tax-deductible MM 2006/7

  29. Basic Financial Statements • Balance Sheet • Income Statement • Statement of Cash Flows Objectives: • current status and past performance information • set performance targets and impose restrictions on the managers • template for financial planning MM 2006/7

  30. The Balance Sheet Assets ≡ Liabilities + Shareholder’s Equity • Tabulates a company’s assets and liabilities at a specific point in time • Sorting • Assets by liquidity • Liabilities by maturity • Assets and liabilities are represented by historical costs • The original cost adjusted for improvements and aging = Book Value • Avoid using market value, since is too volatile and easily manipulated MM 2006/7

  31. U.S. COMPOSITE CORPORATION Balance Sheet 20X2 and 20X1 (in $ millions) Liabilities (Debt) Assets 20X2 20X1 and Stockholder's Equity 20X2 20X1 Current assets: Current Liabilities: Cash and equivalents $140 $107 Accounts payable $213 $197 Accounts receivable 294 270 Notes payable 50 53 Inventories 269 280 Accrued expenses 223 205 Other 58 50 Total current liabilities $486 $455 Total current assets $761 $707 Long-term liabilities: Fixed assets: Deferred taxes $117 $104 Property, plant, and equipment $1,423 $1,274 Long-term debt 471 458 Less accumulated depreciation -550 -460 Total long-term liabilities $588 $562 Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Stockholder's equity: Total fixed assets $1,118 $1,035 Preferred stock $39 $39 Common stock ($1 per value) 55 32 Capital surplus 347 327 Accumulated retained earnings 390 347 Less treasury stock -26 -20 Total equity $805 $725 Total assets $1,879 $1,742 Total liabilities and stockholder's equity $1,879 $1,742 MM 2006/7

  32. The Income Statement Revenue – Expenses ≡ Income • Summarizes the company’s profitability during a time period • Categorization of expenses: • Operating: provide benefits only for the current period • Also included: depreciation (based on historical cost) and R&D • Financing: arising from non-equity financing (interest expenses) • Capital: generate benefits over multiple periods (depreciated) MM 2006/7

  33. U.S. COMPOSITE CORPORATION Income Statement 20X2 (in $ millions) Total operating revenues $2,262 the firm’s revenues and expenses from principal operations Cost of goods sold - 1,655 Selling, general, and administrative expenses - 327 Depreciation - 90 Operating income $190 Other income 29 all financing costs, such as interest expense Earnings before interest and taxes $219 Interest expense - 49 Pretax income $170 the amount of taxes levied on income. Taxes - 84 Current: $71 Deferred: $13 Net income $86 Retained earnings: $43 Dividends: $43 MM 2006/7

  34. The Statement of Cash Flows CF(firm) ≡ CF(debt) + CF(equity) • Reports how much cash is generated during a period • Indicates where the cash comes from and what the firm did with that cash • Cash flow statements are independent of accounting methods • Accounting rules have a second-order effect on cash flows through taxes MM 2006/7

  35. U.S. COMPOSITE CORPORATION Financial Cash Flow 20X2 (in $ millions) Cash Flow of the Firm Cash received from the firm’s assets must equal cash flows to the firm’s creditors & stockholders: Operating cash flow $238 (Earnings before interest and taxes plus depreciation minus taxes) Capital spending -173 (Acquisitions of fixed assets minus sales of fixed assets) Additions to net working capital -23 Total $42 Cash Flow of Investors in the Firm Debt $36 (Interest plus retirement of debt minus long-term debt financing) Equity 6 (Dividends plus repurchase of equity minus new equity financing) Total $42 MM 2006/7

  36. Financial Ratio Analysis Trend / Cross-Sectional Analysis • Profitability Ratios • Activity Ratios • Liquidity Ratios • Financial Leverage Ratios • Market Value Ratios MM 2006/7

  37. Profitability Ratios • Net Return on Assets (ROA) = Net Income / Total Assets • Gross (Pretax) Return on Assets (ROA) = EBIT / Total Assets • Return on Equity (ROE) = Net Income / BV(equity) • Gross Profit Margin = EBIT / Sales • Net Profit Margin = Net Income / Sales MM 2006/7

  38. Activity Ratios Measuring the efficiency of working capital management: • Total Asset Turnover = Sales / Total Assets MM 2006/7

  39. Liquidity Ratios Measuring short-term liquidity: Current Ratio = Current Assets Current Liability MM 2006/7

  40. Financial Leverage Ratios Measuring the firm’s capacity to service its debt and long-term liquidity: • Debt-to-Capital Ratio = Debt / (Debt + Equity) • Debt-to-Equity Ratio = Debt / Equity • Can be based on BV or MV • Similarly: long-term debt ratios MM 2006/7

  41. Market Value Ratios • Price-to-Earnings Ratio = PS/EPS • Stock market price to earnings per share • Dividend Yield = Div/PS • Latest dividend to current stock price • Market-to-Book Value = MV/BV • Similarly: Market-to-Book Equity = ME/BE • Tobin's Q = MV / Replacement Value MM 2006/7

  42. Asset pricing P = Σt CFt/(1+R)t • Bond with coupon C and face value F (at T) • Stocks • Project • Company MM 2006/7

  43. Conclusions Если вам показалось, что я выразился слишком ясно, вы, должно быть, неверно меня поняли

More Related