Bus3431/Fall, 2005/Syllabus 1
BUS3431/FALL, 2005/SYLLABUS 1
BPA431: FINANCIAL MARKETS
Fall, 2005 Lynda Livingston
e-mail: ffice: McIntyre 111-J
office phone: (253) 879-3471office hours: MWF 12:00-1:00[1]
fax:(253) 878-3156TTh 12:30-1:30
and by appointment
COURSE OUTLINE
This course is designed to introduce you to the structure, operation, and regulation of modern financial markets. Well-functioning financial markets are essential for the effective allocation and employment of capital. We will consider the mechanisms that have evolved in the equity and debt markets to facilitate this allocation. Although we will review the basic macroeconomic environment in which our markets operate, this course will focus on examining the microstructure of our financial markets.[2] You will learn how the money market provides debt claims for short-term money management; how the equity and bond markets provide issuers with long-term financing; how newly created financial assets are introduced through the primary market; and how both speculators and hedgers can adjust their risk exposures using the futures markets. Throughout these discussions, we will be intimately concerned with the regulation of these markets by the government; when we are through, you should have a deep appreciation of the profound influence of governmental intervention on the evolution of our markets.
The two major themes of this class are:
- Unfettered financial markets will find a way to bring interested parties together. If there is a market breakdown, intermediaries arise to facilitate transaction.
- Markets respond in a dynamic way to government regulation. There is a dance between markets and government whose basic steps are financial market innovation, governmental regulation, and market response. This dance evolves almost like a system achieving equilibrium. Be sure to watch for adaptation and survival of the fittest.
Watch constantly for examples of these two themes.
You are expected to be thoroughly familiar with time value of money concepts. You can find a very basic review of these ideas in chapter 10 of your textbook (p. 179-183). This alone, however, is insufficient for our needs. Please let me know if you feel overly “rusty” about time value applications, and I will be happy to provide you with some resource materials.
REQUIRED TEXTS:Fabozzi, Modigliani, and Ferri, Foundations of Financial Markets
and Institutions,3rd edition,Prentice Hall (2002).
andThe Wall Street Journal
READINGS:You will also be responsible for numerous readings throughout the semester. I will announce these in class as they arise. I will hand out these readings in class.
ABSENCES:Missing class is a bad idea. Class time is when we discuss the most important and/or difficult topics; your input is required. However, should you miss class, YOU must take responsibility for finding out what we did and whether there is any homework. Homework is due when it’s due, even if you missed the previous class. I cannot take responsibility for remembering who needs what—but you, the person with the most at stake, can. So be sure that you have a good source of information (i.e., a helpful classmate) about what went on during your unfortunate absence.
COURSE REQUIREMENTS
EXAMS:There will be two exams during the semester and a comprehensive final. For in-class exams, you may bring one 8 1/2 x 11" sheet of paper with whatever essential trivia you desire. This sheet must contain hand-written notes ONLY. No make-up exams will be given without a written excuse (such as a doctor's note) for the original absence. You must inform me ON OR BEFORE the exam date that you will need a make-up. All make-ups must be completed within one week of the original exam date. The same material will be covered on a make-up, but the format may be different.
One or both of the exams may be take-home. (You will have input here.) Take-homes will be given out on Thursday and required back at class time the following Tuesday. Rules for take-homes will vary, but will be explicitly spelled out on the first page of the exam. You must sign a compliance statement and return it with your exam.
HOMEWORK:There will be homework assignments required throughout the semester. Homework will be handed out in class. Different assignments will have different preparation times and point totals; some will be due the class period following their distribution, and some will be due later. The exact number of assignments will vary according to my interpretation of your degree of comfort with the material. Some of these homework assignments will be old test questions, so that you can get an idea of what the tests are like.
Homework is due at the beginning of class on the due date. NO LATE HOMEWORK ASSIGNMENTS WILL BE ACCEPTED. I will be handing out homework answers on the same day that the assignments are due, and I obviously cannot accept homework handed in after answers have been given out.
HOMEWORK, continued
You will be allowed to drop one homework score. The homework assignments will have different point totals. Your homework grade will be determined by forming the following ratio: (points earned on kept assignments)/(total points available on kept assignments). (Any extra credit points earned are simply added into the NUMERATOR only.) For example, say you had the following homework scores:
ASSIGNMENTTOTAL POINTSYOUR POINTS
110093
2 5550
3200150
Say you chose to drop HW#1. Then, the total points available on the assignments you kept (#2 and #3) would be 255, out of which you earned 200. Your ratio would therefore be 200/255 = .7843. I would therefore use a grade of 78 for you homework grade. If, on the other hand, you dropped HW#3, your score would be (93+50)/(100+55) = .9226, or 92. You are responsible for determining which homework assignment to drop. You'll tell me on the last day of the quarter. If you do not tell me, I will arbitrarily drop HW#1.
You may work with others in developing answers to homework problems, but you must write up your assignments yourself. Any suggestion of scholastic dishonesty will result in a NONDROPPABLE grade of 0 for that assignment for both the author of the original and the copy.
QUIZZES:
I reserve the right to give any number of unannounced quizzes during the semester. These quizzes may count as extra credit, or they may count as homework. The number of quizzes will be negatively related to the class’s level of preparation and participation.
TERM PAPER:You will write a 10-15 page (double-spaced, typed) research paper on a topic of your choice (but which may not be the same as your discussion topic). This paper will require you to consult at least five published sources, some of which may be popular (such as the Wall Street Journal), but others of which must be academic (such as the Financial Analyst’s Journal). Your paper should demonstrate a thorough understanding of a relevant topic. You will be graded on the thoroughness, accuracy, and clarity of your presentation.
Although I have not specified due dates for outlines and rough drafts, I would be happy to discuss your paper with you at any time. At a minimum, you should let me know your topic; I can then help you define your scope and perhaps suggest fruitful sources of information.
Don’t forget that there is a writing award given out each year to BUS students. Any paper written for a BUS class is eligible.
PARTICIPATION:
Participation is critical! The financial markets change constantly. We’ll never keep up if we don’t work together. You are responsible for helping the rest of us learn. You are therefore expected to be up on current events (the Wall Street Journal is always fair game for tests and quizzes, and is always required reading for every class period). You are responsible for presenting articles (as part of your homework)—the way you choose to convey this information, and your ability to integrate it with the presentations of others—will count toward your participation score. If you want to keep quiet all semester, you need to drop the class now. I am not kidding.
GRADING:Course grades will be determined as follows:
SEMESTER EXAMS17.5% each
FINAL EXAM20%
HOMEWORK20%
PARTICIPATION10%
TERM PAPER15%
TENTATIVE CLASS SCHEDULE
no class on:September 13th
EXAM #1:
EXAM #2:
FINAL EXAM:
in brief:
WEEKTOPIC
1Fisher Separation
2-3(I)money markets
3(II)-5primary markets
6-11capital markets
12-14banking and nondepository institutions
15catch up
READINGS
I will announce the appropriate text readings in class.
The other readings that are listed below are subject to change—I will try to always keep our materials as up-to-date as possible, and I get journals in the mail every month. Use the list below as a guide to times when you should expect readings and as examples of what those readings might look like.
Please note that all readings whose sources are not explicitly identified have been taken from The Financial Institutions and Markets Reader, 3rd edition, edited by Robert Kolb (Blackwell, 1996).
TOPICREADING
INTRODUCTION
introduction/Fisher Separationhandout on Fisher
DEBT I: MONEY MARKETS
corporate assets; return measures; conventionstext: Ch. 5, p. 65-69
Ch. 6, p. 87-95
Ch. 20, p. 381-386
Ch. 22
Treasury billsCh. 16, p. 295-299
READINGS, continued
THE PRIMARY MARKET
- basics of primary markets
underwriting, Rules 144 and 144-A
READING: “Speed of issuance and the adequacy of disclosure in the 144A
high-yield debt market,” Fenn, Journal of Financial
Economics 56, 2000.
- IPOs, rights offerings
READINGS:“The market’s problems with the pricing of initial public offerings,”
Ibbotson, Sindelar, and Ritter
“Alternative flotation methods, adverse selection, and ownership
structure: evidence from seasoned equity issuance in the U.K,”
Slovin, Sushka, and Lai, Journal of Financial Economics 57, 2000.
- auction methods, bond flotation costs
READINGS:“The Economics of Treasury Securities Markets,” Bikhchandani and Huang
“Auctioning Treasury Securities,” Stevens and Dumitru
DEBT II: CAPITAL MARKETS
- bond basics
Treasury STRIPS
READING:“A guide to investing in U.S. Treasury STRIPS,”
Daves, Ehrhardt, and Wachowicz
- municipal bonds
- mortgages and mortgage-backed securities
READINGS:“Making markets for structured mortgage derivatives,”
Oldfield, Journal of Financial Economics 57, 2000 (excerpts)
“An investor’s guide to collateralized mortgage obligations,”
Salomon Smith Barney
READINGS, continued
EQUITY
- basics of secondary markets
- structure of common stock markets
READINGS:“Institutional developments in the globalization of securities and
futures markets,” Scarlata
“Why big firms are courting the day traders,” Barboza
“Market mechanics: An educator’s guide to U.S. stock markets,” The
NasdaqStockMarketUniversity Outreach, 2001.
- preferred stock
BANKING
- characteristics of depository institutions
- regulation of depository institutions
READINGS:“Bank powers and the separation of banking from commerce:
a historical perspective,” Blair
“The economics of merging commercial and investment banking,”
Kwan
“Ex-ante risk and ex-post collapse of S&Ls in the 1980s,”
Brewer and Mondschean
“Underlying causes of commercial bank failures in the 1980s,”
Seballos and Thompson
“Interstate banking and risk,” Levonian
- duration and net worth immunization
READING:“Interest rate derivatives and asset-liability management
by commercial banks,” Simons:
excerpts only (pages to be announced in class)
READINGS, continued
NON-DEPOSITORY FINANCIAL INSTUTIONS
- insurance companies and pension funds
- mutual funds
READINGS:“Changes in financial intermediation: The role of pension and
mutual funds,” Sellon
“Corporate pensions and government insurance: déjà vu all over again?”
Abken: excerpts only (pages to be announced in class)
REFERENCES
SECONDARY MARKETS
“Third Market Reforms: The Overlooked Goal of the SEC’s Order Handling Rules,” Odders-White, Journal of Financial and Quantitative Analysis, June 2004.
“Stock Returns and the Weekend Effect, Kenneth French, Journal of Financial Economics, 1980.
“Crossing Networks and Dealer Markets: Competition and Performance,” Hendershott and Mendelson, Journal of Finance, 2000.
“Evening the Odds: Reform of the Nasdaq Stock Market,” William G. Christie, Contemporary Finance Digest.
“The Impact of Changes in the Nasdaq Stock Market,” Edleson and Smith, Contemporary Finance Digest.
“Can the Treatment of Limit Orders Reconcile the Differences in Trading Costs between NYSE and Nasdaq Issues?” Chung, Van Ness, and Van Ness, Journal of Financial and Quantitative Analysis, June 2001.
“Odd-eighth Avoidance as a Defense against SOES Bandits,” Kandel and Marx, Journal of Financial Economics, 1999.
“The Trading Profits of SOES Bandits, Harris and Schultz, Journal of Financial Economics, 1998.
“Quote-based Competition and Trade Execution Costs in NYSE-listed Stocks,” Bessembinder, Journal of Financial Economics, 2003.
“An Empirical Analysis of NYSE Specialist Trading,” Madhavan and Sofianos, Journal of Financial Economics, 1998.
REFERENCES, continued
“Overnight Information and Opening Prices on the New York Stock Exchange, Freedman and Terry, working paper (1991).
“Market liquidity and trading activity,” Chordia, Roll, and Subrahmanyam, Journal of Finance, 2001.
“Sixteenths: direct evidence on institutional execution costs,” Jones and Lipson, Journal of Financial Economics, 2001.
“Trade size, order imbalance, and the volatility-volume relation,” Chan and Fong, Journal of Financial Economics, 2000.
“Institutional Trading and Alternative Trading Systems,” Conrad, Johnson, and Wahal, Journal of Financial Economics, 12/2003.
“The Impact of Regulation Fair Disclosure: Trading Costs and Information Asymmetry,” Eleswarapu, Thompson, and Venkataraman, Journal of Financial and Quantitative Analysis, June 2004.
“Price Dynamics in the Regular and E-mini Futures Markets,” Kurov and Lasser, Journal of Financial and Quantitative Analysis, June 2004.
IPOs
“The Pricing of Equity IPOs that Follow Public Debt Offerings, Cai, Ramchand, and Warga, Financial Management, Winter 2004.
“The Initial Listing Decisions of Firms that Go Public,” Shane A. Corwin and Jeffrey H. Harris, Financial Management, Spring 2001, p. 35-55.
“The Distribution of Fees within the IPO Syndicate,” Sami Torstila, Financial Management, Winter 2001, p. 25-44.
“The Clustering of IPO Gross Spreads: International Evidence,” Sami Torstila, Journal of Financial and Quantitative Analysis, September 2003, p. 673-694.
“Bookbuilding: How Informative is the Order Book?” Fransesca Cornelli and David Goldreich, Journal of Finance, August 2003, p. 1415-1443.
“IPO Allocations: Discriminatory or Discretionary?” Alexander P. Ljungqvist and William J. Wilhelm Jr., Journal of Financial Economics, 2002, p. 167-201.
“The Expiration of IPO Share Lockups,” Laura Casares Field and Gordon Hanka, Journal of Finance, April 2001, p. 471-500.
“Does Insider Trading Impair Market Liquidity? Evidence from IPO Lockup Expirations,” Charles Cao, Laura Casares Field, and Gordon Hanka, Journal of Financial and Quantitative Analysis, March 2004, p. 25-46.
“Litigation Risk and IPO Underpricing,” Michelle Lowry and Susan Shu, Journal of Financial Economics, 2002, p. 309-335.
“How Stock Flippers Affect IPO Pricing and Stabilizarion,” Raymond P. H. Fishe, Journal of Financial and Quantitative Analysis, June 2002, p. 319-340.
“The Marketing Role of IPOs: Evidence from Internet Stocks,” Elizabeth Demers and Katharina Lewellen, Journal of Financial Economics, 2003, p. 413-437.
“Discounting and Underpricing in Seasoned Equity Offerings,” Oya Altinkilic and Robert Hansen, Journal of Financial Economics, 2003, p. 285-323.
“The Option to Withdraw IPOs During the Premarket: Empirical Analysis,” Walid Y. Busaba, Lawrence M. Benveniste, and Re-Jin Guo, Journal of Financial Economics, 2001, p. 75-102.
“The Really Long-Run Performance of Initial Public Offerings: the Pre-Nasdaq Evidence,” Paul A. Gompers and Josh Lerner, Journal of Finance, August 2003, p. 1355-1392.
DEBT
“Elements of mortgage securitization,” Hess and Smith, Journal of Real Estate Finance and Economics, 1988.
“Derivative mechanics: the CMO,” Haubrich, Economic Commentary, Federal Reserve Bank of Cleveland, 1993.
EQUITY
“Dutch Auction Rate Preferred Stock,” Alderson, Brown, and Lummer, Financial Management, 1987.
“Financial innovations and excesses revisited: The case of Auction Rate Preferred Stock,” Alderson and Fraser, Financial Management, 1993.
DISCUSSION TOPICS
- the stock market crash of 1929: causes and consequencesPAV
- the stock market crash of 1987: causes and consequences GENAY
- Glass-Steagall/Gramm-Leach-Bliley
- hedge funds and their recent problems MEGHAN
- ETFs/REITsJAIME
- pensions: traditional v. cash balance/effect of Social Security privatization?
[1] These hours may occasionally be pre-empted by faculty meetings. Be sure to ask me about this in advance if a meeting is critical.
[2] Related macroeconomic issues are considered more fully in ECON231.