Economics for Financial Markets

Book description

Successful trading, speculating or simply making informed decisions about financial markets means it is essential to have a firm grasp of economics. Financial market behaviour revolves around economic concepts, however the majority of economic textbooks do not tell the full story.

To fully understand the behaviour of financial markets it is essential to have a model that enables new information to be absorbed and analysed with some predictive implications. That model is provided by the business cycle.

'Economics for Financial Markets' takes the reader from the basics of financial market valuation to a more sophisticated understanding of the actions that traders take which ultimately drives the volatility in the financial markets.

The author shows traders, investment managers, risk managers and finance professionals how to distil the flow of information and show what needs to be concentrated on, covering topics such as:

* Why are financial markets subject to economic fashions?
* How has the New Economy changed financial market behaviour?
* Does the creation of the euro fundamentally change the behaviour of the currency markets?

Shows how to distil the vast amount of information in financial markets and identify what is important
Demonstrates how the "New Economy" had changed financial market behaviour
Explains how to follow the behaviour of central banks

Table of contents

  1. Front Cover
  2. Economics for Financial Markets
  3. Copyright Page
  4. Contents (1/2)
  5. Contents (2/2)
  6. Preface
  7. Chapter 1. What do you need to know about macroeconomics to make sense of financial market volatility?
    1. The big picture
    2. Financial markets and the economy
    3. Gross national product and gross domestic product
    4. Monetarism and financial markets
    5. The quantity theory of money – the basis of monetarism
    6. How money affects the economy – the transmission mechanism
    7. The modern quantity theory – modern monetarism
    8. Monetarism and Federal Reserve operating targets from 1970 to the present (1/2)
    9. Monetarism and Federal Reserve operating targets from 1970 to the present (2/2)
    10. The Non-Accelerating Inflation Rate of Unemployment (NAIRU)
  8. Chapter 2. The time value of money: the key to the valuation of financial markets
    1. Future values – compounding
    2. Present values – discounting
    3. Bond and stock valuation
    4. Simple interest and compound interest
    5. Nominal and effective rates of interest
  9. Chapter 3. The term structure of interest rates and financial markets
    1. Functions of interest rates
    2. Determination of interest rates, demand and supply of funds
    3. International factors affecting interest rates
    4. Price and yield – a key relationship
    5. The term structure of interest rates
    6. Determination of forward interest rates
    7. The yield curve
    8. Unbiased expectations theory
    9. Liquidity preference theory
    10. The market segmentation theory
    11. The preferred habitat theory
  10. Chapter 4. How can investors forecast the behaviour of financial markets? The role of business cycles
    1. The cyclical behaviour of economic variables: direction and timing
    2. The stages of the business cycle
    3. The role of inventories in recessions
    4. The business cycle and monetary policy
    5. How does monetary policy affect the economy?
    6. Fundamental analysis, the business cycle, and financial markets
    7. The NBER and business cycles
    8. How do you identify a recession?
    9. The American business cycle: the historical record
    10. The Non-Accelerating Inflation Rate of Unemployment (NAIRU) – a new target for the Federal Reserve
    11. What is the future of the business cycle?
  11. Chapter 5. Which US economic indicators really move the financial markets?
    1. Gross national product and gross domestic product
    2. GDP deflator
    3. Producer price index (PPI)
    4. The index of industrial production
    5. Capacity utilization rate
    6. Commodity prices
    7. Crude oil prices
    8. Food prices
    9. Commodity price indicators: a checklist
    10. Consumer price index (CPI)
    11. Average hourly earnings
    12. The employment cost index (ECI)
    13. Index of leading indicators (LEI)
    14. Vendor deliveries index
  12. Chapter 6. Consumer expenditure, investment, government spending and foreign trade: the big picture
    1. Car sales
    2. The employment report
    3. The quit rate
    4. Retail sales
    5. Personal income and consumer expenditure
    6. Consumer instalment credit
    7. Investment spending, government spending and foreign trade
    8. Residential fixed investment
    9. Non-residential fixed investment
    10. Inventory investment
    11. Government spending and taxation
    12. Budget deficits and financial markets
    13. Foreign trade
  13. Chapter 7. So how do consumer confidence and consumer sentiment indicators help in interpreting financial market volatility?
    1. Michigan index of consumer sentiment (ICS)
    2. Conference board consumer confidence index
    3. National association of purchasing managers index (NAPM)
    4. Business outlook survey of the Philadelphia Federal Reserve
    5. Help-wanted advertising index
    6. Sindlinger household liquidity index
  14. Chapter 8. The global foreign exchange rate system and the ‘Euroization’ of the currency markets
    1. What is the ideal exchange rate system that a country should adopt?
    2. Dollarization and the choice of an exchange rate regime
    3. Why do currencies face speculative attacks?
    4. The IMF exchange rate arrangements
    5. What is the current worldwide exchange rate system? (October 2001) (1/2)
    6. What is the current worldwide exchange rate system? (October 2001) (2/2)
    7. The ‘Euroization’ of the foreign exchange market
    8. The European Exchange Rate Mechanism: ERM II (1/2)
    9. The European Exchange Rate Mechanism: ERM II (2/2)
  15. Chapter 9. Why are exchange rates so volatile? The fundamental and the asset market approach
    1. Exchange rate determination over the long term: the fundamental approach
    2. Determination of exchange rates in the short run: the asset market approach
    3. Why do exchange rates change?
    4. Why are exchange rates so volatile?
  16. Chapter 10. How can investors predict the direction of US interest rates? What do ‘Fed watchers’ watch?
    1. Rule 1: remember the central role of nominal/real GDP quarterly growth
    2. Rule 2: track the yield curve if you want to predict business cycle turning points
    3. Rule 3: watch what the Fed watches – not what you think it should watch
    4. Rule 4: keep an eye on the 3-month euro–dollar futures contract
    5. Rule 5: use Taylor’s rule as a guide to changes in Federal Reserve policy
    6. Rule 6: pay attention to what the Federal Reserve does – not what it says
    7. Rule 7: view potential Federal Reserve policy shifts as a reaction to, rather than a cause of, undesired economic/monetary conditions
    8. Rule 8: remember that ultimately the Federal Reserve is a creature of Congress
    9. Rule 9: follow the trends in FOMC directives: how to interpret Fed speak?
    10. Rule 10: fears of inflation provoke faster changes in monetary policy than do fears of unemployment
  17. Chapter 11. Derivatives: what do you need to know about economics to understand their role in financial markets?
    1. What are derivatives?
    2. Where did derivatives come from?
    3. Some terminology
    4. What is an option?
    5. Exchange-traded versus over-the-counter (OTC) options
    6. Where do option prices come from?
    7. Arbitrage
    8. Probability distributions
    9. Who are the market participants in the derivatives market?
    10. The arbitrageur’s role and the pricing of futures markets
    11. What are the factors influencing the price of futures?
    12. Futures pricing
    13. What is basis?
    14. Spot versus forward arbitrage
    15. What are forward market contracts?
    16. What are futures contracts?
    17. How are options priced?
    18. The binomial model
    19. What determines the value of call options?
    20. What is the profit profile for a call option?
    21. Put options
    22. What are the determinants of the value of a call option?
    23. Black–Scholes model
  18. Chapter 12. The new economic paradigm: how does it affect the valuation of financial markets?
    1. The new economy defined
    2. So what is the new economic paradigm?
    3. The triangle model
    4. The new paradigm and the price earnings ratio
  19. Chapter 13. Bubbleology and financial markets
    1. Introduction
    2. The bubble terminology
    3. The role of expectations in analysing bubbles
    4. Bubbles and the formation of expectations
    5. Bubbles and the efficient market hypothesis
    6. Rational bubbles
    7. Some bubbles in history
    8. Speculative bubbles theory
    9. Rational speculative bubbles
    10. The ‘bubble premium’
  20. Appendix A. Diffusion indexes: their construction and interpretation
  21. Appendix B. The construction and interpretation of price indices
  22. Appendix C. Title, announcement time, and reporting entities for Macroeconomic Announcements
  23. Appendix D. Consumer and business confidence surveys
  24. Appendix E. Useful web addresses (1/2)
  25. Appendix E. Useful web addresses (2/2)
  26. Bibliography (1/2)
  27. Bibliography (2/2)
  28. Index (1/4)
  29. Index (2/4)
  30. Index (3/4)
  31. Index (4/4)

Product information

  • Title: Economics for Financial Markets
  • Author(s): Brian Kettell
  • Release date: December 2001
  • Publisher(s): Butterworth-Heinemann
  • ISBN: 9780080494630