Overview of different origins of financial crises

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Del curso dictado por University of Geneva

Meeting Investors' Goals

907 calificaciones

University of Geneva

Meeting Investors' Goals

907 calificaciones

Curso 2 de 5 en SpecializationInvestment Management

In this course, you will dive into the concepts of rationality and irrationality and understand how they impact our investment decisions and what the consequences can be at the market level. You will first explore the different biases that we, as humans, are subjected to when facing investment decisions and how they may impact the outcomes of these decisions. Moreover, you will see how emotions and ethical concerns such as honesty and trust influence market participants. When they are considered as a group rather than individually, you will discover how rationality and irrationality can drive asset prices to and away from their fair value. Finally, you will be presented with different portfolio construction methodologies and investment styles that make up the landscape of today's portfolio management industry. At key points throughout the course, you will benefit from the practical knowledge of experts from our corporate partner, UBS, in how to build and manage clients' portfolios.

De la lección

Market Efficiency, Bubbles & Crises

In this third week, we will have a look at investors’ behavior as a group. How does it impact asset prices? How do these prices reflect available information? What does it imply for the profitability of some trading strategies? What can go wrong in this price formation process and how can (and did) it cause financial bubbles and crises? This week also features as special guest: Prof. Jean-Pierre Danthine, former vice-chairman of the Swiss National Bank, who will offer insights into some of these issues.

Overview of different origins of financial crises3:44

A first example for the development and fallout of a real crisis: the VW scandal4:51

A second example for the development and fallout of a real crisis: oil shocks - 1970s8:23

A first example of an anticipation crisis: 1987 - The "Fed Model"9:23

A first example of an anticipation crisis: 1987 - The crash8:52

A second example of an anticipation crisis: 200010:14

The perfect storm: the global financial crisis - Global imbalances9:40

The perfect storm: the global financial crisis - Policy errors9:24

The perfect storm: the global financial crisis - Lax regulation7:09

Conoce a los instructores

University of Geneva- Tony Berrada
SFI Associate Professor of Finance
Geneva Finance Research Institute
University of Geneva- Jonas Demaurex
Teaching Assistant
Geneva Finance Research Institute
University of Geneva- Rajna Gibson Brandon
SFI Senior Chaired Professor of Finance and Managing Director of the GFRI
Geneva Finance Research Institute
University of Geneva- Michel Girardin
Lecturer in Macro-Finance - Project Leader for the "Investment Management" specialization
Geneva Finance Research Institute
University of Geneva- Kerstin Preuschoff
Associate Professor of Neurofinance and Neuroeconomics
Geneva Finance Research Institute
University of Geneva- Olivier Scaillet
SFI Senior Chaired Professor of Finance and Vice-dean (research) at GSEM
Geneva Finance Research Institute
University of Geneva- Philip Valta
SFI Assistant Professor of Finance
Geneva Finance Research Institute

[MUSIC]

In this video, I'm going to introduce a simple categorization of the origins and

causes of financial crisis.

In particular, we're going to answer the question, what causes these sharp drop

in asset values that we observe during financial crisis, these market crashes?

To do that I would like to show you a graph that depicts the evolution of

the stock market in the US since 1950 up to today.

As you can see, there are two lines on that graph.

The blue line shows the performance of an investment in the US stock market,

taking into account the dividend payment, not just the capitalization gain.

So not just the changes in stock level, but also the fact that

holding a stock generates a payoff in the form of a dividend payment.

So, the blue line has the dividend and the capital gains.

The red line only has the capital gain.

As you can see, the return, taking in to account the dividend, is order

of magnitudes larger than the return, only taking in to account the capital gains.

What I want to show you by this, is that the accumulation of wealth that we can

observe by investing in the stock market mainly comes from the actual

dividend payment, the cash flow that the firm is distributing to its owner.

The price of the stock reflects this fact.

The stock is the present value of all future dividends.

Because future dividends are uncertain, this is an expected value.

And this is how we're going to categorize these two sources of crisis of

market crash.

The first category of major financial draw down is a shock on productivity or

technology that directly affect the dividend.

We will look at such an example in the following videos.

As we mentioned before, prices reflect information.

The information that pertains to the valuation of stocks is related to their

future dividends.

Price can be inflated if the expectation or

the anticipation of future dividends are overly optimistic.

We would then say that a security or an index is over-valued.

We call this situation when the stock does not reflect

the true fundamental value of the underlying, but merely the over optimistic

anticipation of the market participant, we call this situation a financial bubble.

When the bubble bursts and prices fall back to their fundamental value

we observe a sharp drop in the index of stock valuation.

And this could constitute the second category of crisis.

We will, of course, also discuss such an example in the following videos.

The simple categorizations seems to distinguish two

different origin of crisis, but usually, these things happen together.

This is precisely what we've seen during the recent global financial crisis,

where real shocks collided with overly

optimistic anticipation about the performance of the real estate market.

In one of the videos we will discuss the global financial crisis and

its ramification.

[MUSIC]

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