Basics for market microstructure
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Transcript of Basics for market microstructure
Basics for market Basics for market microstructuremicrostructureStock market is a slough of fear and greed untethered to corporate realities – Warren Buffet
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What is finance?What is finance? Capital marketsCapital markets
– Portfolio managementPortfolio management– Asset pricingAsset pricing
• Time and cross dimensionsTime and cross dimensions– Risk managementRisk management– Financial engineeringFinancial engineering– Performance evaluationPerformance evaluation– Market microstructureMarket microstructure
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What is finance?What is finance? Corporate financeCorporate finance
– Capital budgetingCapital budgeting• Project valuationProject valuation
– Capital structureCapital structure– Mergers and acquisitionsMergers and acquisitions
• Company valuationCompany valuation– Going private / public (IPO)Going private / public (IPO)– Corporate governanceCorporate governance
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Potential employer / Potential employer / job functionjob function Investment bankInvestment bank
– Corporate finance: help companies to raise Corporate finance: help companies to raise capitalcapital
– M&A: value companies, structure deals, M&A: value companies, structure deals, negotiatenegotiate
– Trading equity, FI, FX, derivativesTrading equity, FI, FX, derivatives– Structured finance: create new instrumentsStructured finance: create new instruments– Analyst / researchAnalyst / research
Commercial bankCommercial bank– Loans to individuals and companiesLoans to individuals and companies– MortgageMortgage– Private bankingPrivate banking
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Potential employer / Potential employer / job functionjob function Money management: mutual / Money management: mutual /
pension / hedge fundspension / hedge funds– Portfolio manager: select investmentsPortfolio manager: select investments– Investment advisorInvestment advisor– AnalystAnalyst
Corporate finance dept in a Corporate finance dept in a companycompany
Audit companyAudit company
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Market microstructureMarket microstructure Financial marketsFinancial markets Financial instrumentsFinancial instruments Financial intermediariesFinancial intermediaries
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Financial marketsFinancial markets Primary vs secondaryPrimary vs secondary Exchanges vs OTCExchanges vs OTC Dealership vs (batch / Dealership vs (batch /
continuous) auctioncontinuous) auction Listing/Depositary receiptsListing/Depositary receipts
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Financial marketsFinancial markets Objective:Objective: facilitate trading to allow facilitate trading to allow
– Money transfer over timeMoney transfer over time– Risk sharingRisk sharing– Price discoveryPrice discovery
Issues: Issues: transaction coststransaction costs– Info asymmetryInfo asymmetry– LiquidityLiquidity– Informational efficiencyInformational efficiency
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Financial instrumentsFinancial instruments Basic: stocks and bondsBasic: stocks and bonds Derivatives: forwards, futures, Derivatives: forwards, futures,
options, swaps, etc.options, swaps, etc. IndicesIndices
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Financial instrumentsFinancial instruments ObjectivesObjectives
– MarketableMarketable– Give specific payoff in a given state Give specific payoff in a given state
of the natureof the nature IssuesIssues
– Specifics vs Specifics vs liquidliquidity/ simplicityity/ simplicity– Counterparty riskCounterparty risk– Bad incentivesBad incentives
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Financial Financial intermediariesintermediaries Brokers / dealersBrokers / dealers Commercial banksCommercial banks Investment banksInvestment banks Mutual / pension / hedge fundsMutual / pension / hedge funds Wealth managementWealth management
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Financial Financial intermediariesintermediaries ObjectivesObjectives
– Minimize transaction costsMinimize transaction costs• Economies of scaleEconomies of scale
– Solve information problemsSolve information problems– Brokerage vs qualitative Brokerage vs qualitative asset transformationasset transformation
IssuesIssues– Agency problemAgency problem– Coordination Coordination – Conflict of interestConflict of interest
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Jargon Jargon Short salesShort sales SpreadSpread InsiderInsider Market-makerMarket-maker Listing Listing Liquidity Liquidity SecuritizationSecuritization Market efficiencyMarket efficiency ArbitrageArbitrage
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Books Books Description Library Scanned
Бригхем, Гапенски. Финансовый менеджмент x
Sharpe, Alexander, Baily. Investments x x
Grinblatt, Titman. Financial Markets and Corporate Strategy x
Megginson. Corporate Finance Theory x
Haugen. Modern Investment Theory x
Hull. Options, Futures, and Other Derivatives x x
Малюгин. Рынок ценных бумаг: Количественные методы анализа
Энциклопедия финансового риск-менеджмента. Под ред. Лобанова и Чугунова
x
Jorion Financial Risk Manager Handbook x
CFA study notes x
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Further coursesFurther courses Investment theoryInvestment theory Corporate financeCorporate finance Econometrics of financial Econometrics of financial
marketsmarkets Risk managementRisk management
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Lecture 2: plan Lecture 2: plan Prices and returnsPrices and returns Why is the discount rate positive?Why is the discount rate positive? Index models and CAPMIndex models and CAPM SpSpeecifics of corporationcifics of corporation Stocks vs bondsStocks vs bonds Financial statements and Financial statements and
coefficientscoefficients
Prices and returnsPrices and returns-Why do prices rise?-Why do prices rise?- Because there are more buyers - Because there are more buyers than sellers!than sellers!
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Prices and returnsPrices and returns How to define returns?How to define returns?
– for stocks / bondsfor stocks / bonds Why usually employ returns in Why usually employ returns in
models?models? Why need stochastics?Why need stochastics? How to account for transaction How to account for transaction
costs?costs?
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Discount rateDiscount rate Time preferenceTime preference InflationInflation RiskRisk
ModelsModelsThe one investment certainty is The one investment certainty is that we are all frequently wrongthat we are all frequently wrong
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Index modelsIndex models Market model: Market model: RRii,,tt = = ααii + + ββiiRRM,tM,t + + εεii,,tt, ,
– where E(εwhere E(εi,ti,t)=0, cov()=0, cov(RRMM, ε, εii)=0)=0 Risk managementRisk management: ΔR: ΔRii ≈ β ≈ βiiΔΔRRMM Separation of total risk on systematic and Separation of total risk on systematic and
idiosyncraticidiosyncratic: : varvar((RRii)=)=ββii22σσ22
MM++σσ22((εε))ii– Systematic risk depends on factor exposures (betas)Systematic risk depends on factor exposures (betas): :
ββii22σσ22
MM
– Idiosyncratic risk can be reduced by diversificationIdiosyncratic risk can be reduced by diversification Covariance matrixCovariance matrix: : covcov((RRii, , RRjj) = ) = ββiiββjjσσ22
MM– Assuming Assuming E(εE(εiiεεjj)=0 )=0 forfor i≠j i≠j
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CAPMCAPM More restrictive model: More restrictive model: E[E[RRii,,tt--RRFF,,tt] ] = =
ββiiE[RE[RM,tM,t--RRFF,,tt]] – where E(εwhere E(εi,ti,t)=0, cov()=0, cov(RRMM, ε, εii)=0)=0
The expected excess return of each asset is The expected excess return of each asset is proportional to its betaproportional to its beta– Investors require higher expected returns on Investors require higher expected returns on
assets with higher systematic riskassets with higher systematic risk In the equilibrium, everybody invests in the In the equilibrium, everybody invests in the
market portfolio (of risky assets) and risk-market portfolio (of risky assets) and risk-free ratefree rate
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Мифы / СтереотипыМифы / Стереотипы
«Количественные модели «Количественные модели объективны»объективны»
«Чем сложнее модель, тем лучше»«Чем сложнее модель, тем лучше»«Количественные модели могут «Количественные модели могут
дать точный прогноз»дать точный прогноз»«Модели дают прогноз и расчет «Модели дают прогноз и расчет
стоимости компании раз и стоимости компании раз и навсегда»навсегда»
Specifics of Specifics of corporation corporation The most investor can lose is The most investor can lose is everything?everything?
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Forms of Business Forms of Business OrganizationOrganization Sole proprietorshipSole proprietorship PartnershipPartnership CorporationCorporationEvaluate byEvaluate by The life of the entityThe life of the entity The ability to raise capitalThe ability to raise capital The owners' liabilityThe owners' liability
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Modern CorporationModern Corporation
AdvantagesAdvantages– Limited liabilityLimited liability
• 1811: 1811: general act of incorporation in NYgeneral act of incorporation in NY
– Easy transfer of ownershipEasy transfer of ownership– Unlimited lifeUnlimited life– Ability to raise large amounts of Ability to raise large amounts of
moneymoney
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Modern CorporationModern Corporation
DisadvantagesDisadvantages– Start-up can be costlyStart-up can be costly– Earnings subject to double Earnings subject to double
taxationtaxation– The agency problemThe agency problem
• Separation of control and ownershipSeparation of control and ownership• The leverage effect of debtThe leverage effect of debt
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Equity vs DebtEquity vs Debt ShareholdersShareholders
– Control rights (e.g., elect directors)Control rights (e.g., elect directors)– Limited liabilityLimited liability– Residual claim on assets (after paying up Residual claim on assets (after paying up
liabilities)liabilities)– Dividends (fully taxable)Dividends (fully taxable)
DebtholdersDebtholders– Fixed contractual claim against the corporationFixed contractual claim against the corporation– No voting power unless the debt is not paidNo voting power unless the debt is not paid– Interest on debt is tax-deductibleInterest on debt is tax-deductible
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Basic Financial Basic Financial StatementsStatements1.1. Balance SheetBalance Sheet2.2. Income StatementIncome Statement3.3. Statement of Cash FlowsStatement of Cash FlowsObjectives:Objectives: current status and past performance current status and past performance
informationinformation set performance targets and impose set performance targets and impose
restrictions on the managersrestrictions on the managers template for financial planningtemplate for financial planning
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The Balance SheetThe Balance SheetAssets ≡ Liabilities + Shareholder’s Assets ≡ Liabilities + Shareholder’s
EquityEquity Tabulates a company’s assets and liabilities at a Tabulates a company’s assets and liabilities at a
specific point in time specific point in time Sorting Sorting
– Assets by liquidityAssets by liquidity– Liabilities by maturityLiabilities by maturity
Assets and liabilities are represented by historical Assets and liabilities are represented by historical costscosts– The original cost adjusted for improvements and aging = The original cost adjusted for improvements and aging =
Book ValueBook Value– Avoid using market value, since is too volatile and easily Avoid using market value, since is too volatile and easily
manipulatedmanipulated
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(in $ millions)20X2 and 20X1Balance Sheet
U.S. COMPOSITE CORPORATION
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
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The Income StatementThe Income StatementRevenue – Expenses ≡ IncomeRevenue – Expenses ≡ Income
Summarizes the company’s profitability during Summarizes the company’s profitability during a time period a time period
Categorization of expenses:Categorization of expenses:– Operating: provide benefits only for the current Operating: provide benefits only for the current
periodperiod• Also included: depreciation (based on historical cost) and Also included: depreciation (based on historical cost) and
R&DR&D– Financing: arising from non-equity financing Financing: arising from non-equity financing
(interest expenses)(interest expenses)– Capital: generate benefits over multiple periods Capital: generate benefits over multiple periods
(depreciated)(depreciated)
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(in $ millions)20X2
Income StatementU.S. COMPOSITE CORPORATION
Total operating revenuesCost of goods soldSelling, general, and administrative expensesDepreciationOperating incomeOther incomeEarnings before interest and taxesInterest expensePretax incomeTaxes Current: $71 Deferred: $13Net income Retained earnings: $43 Dividends: $43
the firm’s revenues and expenses from principal operations
$2,262- 1,655
- 327- 90
$19029
$219- 49
$170- 84
$86
all financing costs, such as interest expense
the amount of taxes levied on income.
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The Statement of Cash The Statement of Cash FlowsFlows
CF(firm) ≡ CF(debt) + CF(firm) ≡ CF(debt) + CF(equity)CF(equity)
Reports how much cash is generated Reports how much cash is generated during a periodduring a period– Indicates where the cash comes from Indicates where the cash comes from
and what the firm did with that cashand what the firm did with that cash Cash flow statements are Cash flow statements are
independent of accounting methodsindependent of accounting methods– Accounting rules have a second-order Accounting rules have a second-order
effect on cash flows through taxeseffect on cash flows through taxes
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(in $ millions)20X2
Financial Cash FlowU.S. COMPOSITE CORPORATION
Cash Flow of the FirmOperating 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 FirmDebt $36 (Interest plus retirement of debt minus long-term debt financing)Equity 6 (Dividends plus repurchase of equity minus new equity financing) Total $42
)()()(SCFBCF
ACF
Cash received from the firm’s assets must equal cash flows to the firm’s creditors & stockholders:
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Financial Ratio Financial Ratio AnalysisAnalysisTrendTrend / / Cross-SectionalCross-Sectional
Analysis Analysis Profitability RatiosProfitability Ratios Activity Ratios Activity Ratios Liquidity Ratios Liquidity Ratios Financial Leverage Ratios Financial Leverage Ratios Market Value RatiosMarket Value Ratios
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Profitability RatiosProfitability Ratios Net Return on Assets (ROA) Net Return on Assets (ROA) = =
Net Income / Total AssetsNet Income / Total Assets Gross (Pretax) Return on Assets Gross (Pretax) Return on Assets
(ROA) (ROA) = EBIT / Total Assets= EBIT / Total Assets Return on Equity (ROE) Return on Equity (ROE) = Net = Net
Income / BV(equity)Income / BV(equity) Gross Profit Margin = EBIT / SalesGross Profit Margin = EBIT / Sales Net Profit Margin = Net Income / Net Profit Margin = Net Income /
SalesSales
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Activity RatiosActivity Ratios
Measuring the efficiency of Measuring the efficiency of working capital working capital management:management:
Total Asset Turnover Total Asset Turnover = Sales / Total = Sales / Total
AssetsAssets
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Liquidity RatiosLiquidity Ratios
Measuring short-term Measuring short-term liquidity:liquidity:
Current Ratio = Current Ratio = Current Current AssetsAssets Current LiabilityCurrent Liability
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Financial Leverage Financial Leverage RatiosRatiosMeasuring the firm’s capacity to Measuring the firm’s capacity to
service its debt and long-term service its debt and long-term liquidity:liquidity:
Debt-to-Capital Ratio = Debt-to-Capital Ratio = Debt / (Debt + Equity)Debt / (Debt + Equity)
Debt-to-Equity Ratio = Debt / EquityDebt-to-Equity Ratio = Debt / Equity– Can be based on BV or MVCan be based on BV or MV– Similarly: long-term debt ratiosSimilarly: long-term debt ratios
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Market Value RatiosMarket Value Ratios Price-to-Earnings Ratio = PPrice-to-Earnings Ratio = PSS/EPS/EPS
– Stock market price to earnings per shareStock market price to earnings per share Dividend Yield = Div/PDividend Yield = Div/PSS
– Latest dividend to current stock priceLatest dividend to current stock price Market-to-Book Value = MV/BVMarket-to-Book Value = MV/BV
– Similarly: Market-to-Book Equity = ME/BESimilarly: Market-to-Book Equity = ME/BE Tobin's Q = MV / Replacement ValueTobin's Q = MV / Replacement Value
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Asset pricingAsset pricingP = P = ΣΣtt CF CFtt/(1+R)/(1+R)tt
Bond with coupon C and face value Bond with coupon C and face value F (at T)F (at T)
Stocks Stocks ProjectProject CompanyCompany
ConclusionsConclusions
Если вам показалось, что я выразился слишком ясно, вы, должно быть, неверно меня поняли