The Universal Principle of Risk Management: Pooling and the Hedging of Risks

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收藏 2010-03-30

The 2nd session of Financial Markets(Yale Open Courses) by Bob Shiller
http://oyc.yale.edu/economics/financial-markets/content/sessions.html

Session 2 The Universal Principle of Risk Management: Pooling and the Hedgingof Risks
(Transcript attached)
Overview:
Statistics and mathematics underliethe theories of finance. Probability Theory and various distribution types areimportant to understanding finance. Risk management, for instance, depends ontools such as variance, standard deviation, correlation, and regressionanalysis. Financial analysis methods such as present values and valuing streamsof payments are fundamental to understanding the time value of money and havebeen in practice for centuries.
The ideaof Finance is Probability
Insurance based on the assumption of independence of the events

and Lecture 9 from the same coursesby David Swensen
(Transcript attached)
Overview:
David Swensen, Yale's ChiefInvestment Officer and manager of the University's endowment, discusses thetactics and tools that Yale and other endowments use to create long-term,positive investment returns. He emphasizes the importance of asset allocationand diversification and the limited effects of market timing and securityselection. Also, the extraordinary returns of hedge funds, one of the morerecent phenomena of portfolio management, should be looked at closely, with aneye for survivorship and back-fill biases.

Related publications:
Irrational Exuberance by Robert J.Shiller (Arthur M. Okun Professor of Economics Yale University)
Princeton University Press; 2edition (February 22, 2005)
http://www.amazon.com/Irrational-Exuberance-Robert-J-Shiller/dp/0691123357/ref=ntt_at_ep_dpt_4
Part OneStructural Factors

Three Precipitating factors: the capitalist explosion, the Internet andother events

12 factors that propelled the market bubbles:
- the capitalist explosion and the ownership society
- culturaland political changes favoring business success
- newinformation technology
-supportive monetary policy and the Greenspan put
- the babyboom and bust their perceived effects on the market
- anexpansion in media reporting of business news
-analyst's optimistic forecasts
- theexpansion of defined contribution pension plans
- thegrowth of mutual funds
- thedecline of inflation and the effects of money illusion
-expansion of the volume of trade: discount brokers, day traders, and 24 hourtrading
- the riseof gambling opportunities

The New Financial Order
by Robert J. Shiller
Princeton University Press (July 6,2004)
http://www.amazon.com/New-Financial-Order-Risk-Century/dp/0691120110/ref=ntt_at_ep_dpt_2
The New Financial Order
Risk in the 21st Century

Robert J. Shiller

Six ideas for a New Financial Order

- the first three are intended primarily for the private sector: insurance,financial markets and banking. Each industry has evolved its own methods ofdealing with moral hazard, defining contracts and selecting clients.

- the next three ideas are designed primarily for development by thegovernment, both through taxation, and social welfare and through agreementswith other countries.

The first idea is to extend the purview of insurance to cover long termeconomic risks. Livelihood insurance
would protect againstlong-term risks to individuals' paychecks.

Home equity insurance
wouldprotect the economic value of the home but would go far beyond just againstspecific risks to homes such as fires, but also against all risks that impingeon the economic value of homes. In the form offered here, first proposed by mycolleague Allan Weiss and me in 1994, the problem of moral hazard is dealt withby tying the insurance contracts to indexes of real estate prices.

The second idea for a new financial order is for macro markets; itenvisions large international markets for long-term claims on nationalincomes and occupational incomes as well as for illiquid assets such asreal estate.

The third idea is income-linked loans.Banks and other lending institutions would provide loans that are contingent onincomes to individuals, corporations and governments. The loan balance wouldautomatically be reduced if income falls short of expectations.

The fourth idea is inequalityinsurance, which is designed to address definitely, within a nation, theserious risk that income in the future will be distributed among people farless equally that it now is.

The fifth idea is inter-generational socialsecurity, allowing genuine and complete inter-generational risksharing.

The sixth idea is international agreementsto manage risks to national economies.

The result will be the stabilization and enhancement of our economies and ourlives.

The world since 1950
......
In the United States in the early 1980s, elderly people would not haveexperienced the windfall caused by inflation indexing of their benefits, at theexpense of younger people.
An unexpected rise in inflation occurred in almost all major countries betweenaround 1960 and 1980. If contracts had all been indexed, long-term bond holdersmight not have seen their real wealth decimated by 1980.
People who retired in 1960 and lived thirty more years might not have seentheir real value pension income reduced by two-thirds as the years went by.Homeowners who bought near the beginning of this period might now have receivedthe tremendous windfall they did due to the inflation because their mortgageswould have been fixed in money terms. Of course, the actual windfall came atthe expense of bondholders and savings accounts holders, especially those whowere not homeowners.
Since the mid-1990s we have seen substantial deflation in Japan. With inflationfalling far short of earlier expectations here, the real value of debts haveturned out to be far higher than borrowers expected, compromising the bankingsystem, and stagnating Japan's economy.
The SubprimeSolution: How Today's Global Financial Crisis Happened, and What to Do aboutIt Robert J. Shiller
http://www.amazon.com/Subprime-Solution-Todays-Financial-Happened/dp/0691139296/ref=ntt_at_ep_dpt_1

UnconventionalSuccess: A Fundamental Approach to Personal Investment
by David F. Swensen
http://www.amazon.com/Unconventional-Success-Fundamental-Approach-Investment/dp/B001TK2BMA/ref=sr_1_2?ie=UTF8&s=books&qid=1269883798&sr=1-2-spell

PioneeringPortfolio Management: An Unconventional Approach to Institutional Investment,Fully Revised and Updated
by David F. Swensen
http://www.amazon.com/Pioneering-Portfolio-Management-Unconventional-Institutional/dp/1416544690/ref=sr_1_1?ie=UTF8&s=books&qid=1269883798&sr=1-1-spell

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zhoupuhan

2010-6-19 18:07:39

no book download?

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sshang

2010-6-30 19:05:12

its highly recommended listening to Rob (Shiller)'s online course provided by Open Yale. Rob Shiller created housing futures a few years ago, which is a tool to hedge housing prices in the states. You may find the contents of his course posted below (though its just an introductory course, the course also features some wall street fund manager includingDavid Swensen,who runs the fund for Yale, and one of the most successful of the kind) . Just click the given link, both mp3 files and transcripts are available on the site. Enjoy! ^ ^

http://oyc.yale.edu/economics/financial-markets/content/sessions.html

ECON 252: Financial MarketsClass SessionsClick session titles below to access audio, video, and course materials.

1. Finance and Insurance as Powerful Forces in Our Economy and Society

2. The Universal Principle of Risk Management: Pooling and the Hedging of Risks

3. Technology and Invention in Finance

4. Portfolio Diversification and Supporting Financial Institutions (CAPM Model)

5. Insurance: The Archetypal Risk Management Institution

6. Efficient Markets vs. Excess Volatility

7. Behavioral Finance: The Role of Psychology

8. Human Foibles, Fraud, Manipulation, and Regulation

9. Guest Lecture by David Swensen

10. Debt Markets: Term Structure

Midterm Exam 1

11. Stocks