Computing Equilibrium

Lecture Description

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 examples, how the theory lets us calculate equilibrium prices and allocations in a simple economy, either by hand or using a computer. In future lectures we shall extend this method so as to compute equilibrium in financial economies with stocks and bonds and other financial assets.

Course Description

This course attempts to explain the role and the importance of the financial system in the global economy. Rather than separating off the financial world from the rest of the economy, financial equilibrium is studied as an extension of economic equilibrium. The course also gives a picture of the kind of thinking and analysis done by hedge funds.

Course Index

1. Why Finance?
2. Utilities, Endowments, and Equilibrium
3. Computing Equilibrium
4. Efficiency, Assets, and Time
5. Present Value Prices and the Real Rate of Interest
6. Irving Fisher's Impatience Theory of Interest
7. Collateral, Present Value and the Vocabulary of Finance
8. Budgeting for a Long-Lived Institution, Yield
9. Dynamic Present Value
10. Social Security
11. Overlapping Generations Models of the Economy
12. Demography and Asset Pricing
13. Quantifying Uncertainty and Risk
14. Uncertainty and the Rational Expectations Hypothesis
15. Backward Induction and Optimal Stopping Times
16. Callable Bonds and the Mortgage Prepayment Option
17. Modeling Mortgage Prepayments and Valuing Mortgages
18. History of the Mortgage Market: A Personal Narrative
19. Dynamic Hedging
20. Dynamic Hedging and Average Life
21. Risk Aversion and the Capital Asset Pricing Theorem
22. The Mutual Fund Theorem and Covariance Pricing Theorems
23. Risk, Return, and Social Security
24. The Leverage Cycle and the Subprime Mortgage Crisis
25. The Leverage Cycle and Crashes