THEINVESTMENTENVIRONMENT投资环境

THEINVESTMENTENVIRONMENTLecture1HafizHoque1-11-2RealAssetsDeterminetheproductivecapacityandnetincomeoftheeconomyExamples:Land,buildings,machines,knowledgeusedtoproducegoodsandservicesFinancialAssetsClaimsonrealassetsRealAssetsVersusFinancialAssetsHafizHoque1-3FinancialAssetsThreetypes:1.Fixedincomeordebt2.Commonstockorequity3.DerivativesecuritiesHafizHoque1-4FixedIncomePaymentsfixedordeterminedbyaformulaMoneymarketdebt:shortterm,highlymarketable,usuallylowcreditriskCapitalmarketdebt:longtermbonds,canbesafeorriskyHafizHoque1-5CommonStockandDerivativesCommonStockisequityorownershipinacorporation.Paymentstostockholdersarenotfixed,butdependonthesuccessofthefirmDerivativesValuederivesfrompricesofothersecurities,suchasstocksandbondsUsedtotransferriskHafizHoque1-6FinancialMarketsandtheEconomyInformationRole:CapitalflowstocompanieswithbestprospectsConsumptionTiming:UsesecuritiestostorewealthandtransferconsumptiontothefutureHafizHoque1-7FinancialMarketsandtheEconomy(Ctd.)AllocationofRisk:InvestorscanselectsecuritiesconsistentwiththeirtastesforriskSeparationofOwnershipandManagement:WithstabilitycomesagencyproblemsHafizHoque1-8FinancialMarketsandtheEconomy(Ctd.)CorporateGovernanceandCorporateEthicsAccountingScandalsExamples–Enron,RiteAid,HealthSouthAuditors–watchdogsofthefirmsAnalystScandalsArthurAndersenSarbanes-OxleyActTightentherulesofcorporategovernanceHafizHoque1-9TheInvestmentProcessAssetallocationChoiceamongbroadassetclassesSecurityselectionChoiceofwhichsecuritiestoholdwithinassetclassSecurityanalysistovaluesecuritiesanddetermineinvestmentattractivenessHafizHoque1-10MarketsareCompetitiveRisk-ReturnTrade-OffEfficientMarketsActiveManagementFindingmispricedsecuritiesTimingthemarketHafizHoque1-11MarketsareCompetitive(Ctd.)PassiveManagementNoattempttofindundervaluedsecuritiesNoattempttotimethemarketHoldingahighlydiversifiedportfolioHafizHoque1-12ThePlayersBusinessFirms–netborrowersHouseholds–netsaversGovernments–canbebothborrowersandsaversHafizHoque1-13ThePlayers(Ctd.)FinancialIntermediaries:PoolandinvestfundsInvestmentCompaniesBanksInsurancecompaniesCreditunionsHafizHoque1-14UniversalBankActivitiesInvestmentBanking•Underwritenewstockandbondissues•Sellnewlyissuedsecuritiestopublicintheprimarymarket•InvestorstradepreviouslyissuedsecuritiesamongthemselvesinthesecondarymarketsCommercialBanking•TakedepositsandmakeloansHafizHoque1-15FinancialCrisisof2008AntecedentsoftheCrisis:“TheGreatModeration”:atimeinwhichtheU.S.hadastableeconomywithlowinterestratesandatamebusinesscyclewithonlymildrecessionsHistoricboominhousingmarketHafizHoque1-16Figure1.3TheCase-ShillerIndexofU.S.HousingPricesHafizHoque1-17ChangesinHousingFinanceOldWayLocalthriftinstitutionmademortgageloanstohomeownersThrift’smajorasset:aportfoliooflong-termmortgageloansThrift’smainliability:deposits“Originatetohold”NewWaySecuritization:FannieMaeandFreddieMacboughtmortgageloansandbundledthemintolargepoolsMortgage-backedsecuritiesaretradableclaimsagainsttheunderlyingmortgagepool“Originatetodistribute”HafizHoque1-18Figure1.4CashFlowsinaMortgagePass-ThroughSecurityHafizHoque1-19ChangesinHousingFinance(Ctd.)Atfirst,FannieMaeandFreddieMacsecuritizedconformingmortgages,whichwerelowerriskandproperlydocumented.Later,privatefirmsbegansecuritizingnonconforming“subprime”loanswithhigherdefaultrisk.LittleduediligencePlacedhigherdefaultriskoninvestorsGreateruseofARMsand“piggyback”loansHafizHoque1-20MortgageDerivativesCollateralizeddebtobligations(CDOs)MortgagepooldividedintoslicesortranchestoconcentratedefaultriskSeniortranches:Lowerrisk,highestratingJuniortranches:Highrisk,loworjunkratingHafizHoque1-21MortgageDerivativesProblem:Ratingswerewrong!Riskwasmuchhigherthananticipated,evenfortheseniortranchesHafizHoque1-22WhywasCreditRiskUnderestimated?NooneexpectedtheentirehousingmarkettocollapseallatonceGeographicdiversificationdidnotreduceriskasmuchasanticipatedAgencyproblemswithratingagenciesCreditDefaultSwaps(CDS)didnotreduceriskasanticipatedHafizHoque1-23CreditDefaultSwap(CDS)ACDSisaninsurancecontractagainstthedefaultoftheborrowerInvestorsboughtsub-primeloansandusedCDStoinsuretheirsafetyHafizHoque1-24CreditDefaultSwap(CDS)SomebigswapissuersdidnothaveenoughcapitaltobacktheirCDSwhenthemarketcollapsed.Consequence:CDOinsurancefailedHafizHoque1-25RiseofSystemicRiskSystemicRisk:apotentialbreakdownofthefinancialsysteminwhichproblemsinonemarketspilloveranddisruptothers.OnedefaultmaysetoffachainoffurtherdefaultsWavesofsellingmayoccurinadownwardspiralasassetpricesdropPotentialcontagionfrominstitutiontoinstitution,andfrommarkettomarketHafizHoque1-26RiseofSystemicRisk(Ctd.)Bankshadamismatchbetweenthematurityandliquidityoftheirassetsandliabilities.LiabilitieswereshortandliquidAssetswerelongandilliquidConstantneedtorefinancetheassetportfolioBankswereveryhighlylevered,givingthemalmostnomarginofsafety.HafizHoque1-27RiseofSystemicRisk(Ctd.)Investorsreliedtoomuchon“creditenhancement”throughstructuredproductslikeCD