Money and Capital Markets
Professor John W. Sell

Outline and Reading List

Note: Readings marked with an asterisk (*) are required for this course.

Text:  Frederic Mishkin and Stanley Eakins:  Financial Markets and Institutions 7th ed. (Boston, MA: Pearson, 2012)
            The text is available at the Florence O. Wilson Bookstore for purchase or rental and is required for the course.

The Wall Street Journal provides many practical examples of course material and is a good resource for a variety of business- and finance-related topics.  You can subscribe online to both the web and print editions at student rates by clicking this link.

A Classic:

Marcia Stigum, The Money Market rev. ed. (Homewood IL: Dow Jones-Irwin, 1983)

Commonly Used Abbreviations:

D & G = Herbert E. Dougall and Jack E. Graumnitz, Capital Markets and Institutions 4th ed. (Englewood Cliffs: Prentice-Hall, 1980)
P & S = Richard A. Posner and Kenneth E. Scott, Economics of Corporation Law and Securities Regulation (Boston: Little Brown and Company, 1980)
Sharpe = William F. Sharpe and Gordon Alexander, Investments 4th ed. (Englewood Cliffs: Prentice-Hall, 1990)

AER = American Economic Review
JF = Journal of Finance
JLE = Journal of Law & Economics
JMCB = Journal of Money, Credit, and Banking

I. Introduction

*Text: Chapters 1, 2
Barzel, Y.: "Transactions Costs: Are They Just Costs?" Journal of Institutional & Theoretical Economics (March 1985) pp.4-16
Benston, G. and Smith, C.: "A Transactions Cost Approach to the Theory of Financial Intermediaries" JF (May 1976) pp. 215-31
*Demsetz, H:  "The Cost of Transacting", Quarterly Journal of Economics, Vol. 82 (1968), pp. 33-53
Zhang, H and S. Hodges:  "An Extended Model of the Bid-Ask Spread"  SSRN Working Paper (August 4, 2011)
D & G: Chapters 1 and 2

II. The Theory of Exchange and Markets

*Text: Chapter 7
*Blume, L. and D. Easley: "Market Competition and Selection" New Palgrave Dictionary of Economics 2nd ed. (2007)
*Hayek, F: "The Use of Knowledge in Society" AER (September 1945)
"The Rise of Dark Pools", Economist (July 2, 2009)
Alchian, A.: "Why Money?" JMCB (Februany 1977) pp. 133-40
Bailey, M.: "Approximate Optimality of Aboriginal Property Rights," JLE (April 1992) pp. 183-98
Campbell, T. and Kracaw, W.: "Information Production, Market Signaling, and the Theory of Financial Intermediation" JF (September 1980) pp. 863-82
Demsetz, H.: "Toward a Theory of Property Rights" AER (May 1967) pp.347-73
ODriscoll, G: Economics as a Coordination Problem (Menlo Park, CA: Institute for Humane Studies, 1977) Chapter 2

III. The Money Market

*Text: Chapters 17, 11, 19
United States Federal Reserve: Purposes and Functions (most relevant are chapter 1 and chapter 3)
Benston, G.: "The Optimal Bank Structure: Theory and Evidence" Journal of Bank Research (Winter 1973)
Black, F.: "Bank Funds Management in an Efficient Market" Journal of Financial Economics 2 (1975) pp. 323-39
Hall, W.: "How the American System of Bank Regulation Developed" The Banker (September 1974) pp. 1101-07
Hurley, E.: "The Commercial Paper Market" Federal Reserve Bulletin (June 1977) pp. 525-36
Lucas, C.; Jones, M.; and Thurston, T.: "Federal Funds and Repurchase Agreements" Quarterly Review (Federal Reserve Bank of New York, SummerÝ1977) pp. 33-48
Melton, W.: "The Market for Large Negotiable CD's" Quarterly Review (Federal Reserve Bank of New York, Winter 1977-78) pp. 27-34
Miller, M. and Orr, D.: " A Model of the Demand for Money by Firms" Quarterly Journal of Economics (August 1966)
Stigum: Chapters 3,4,7,12,14,15,17

First Examination (Sept. 29, 2011)

IV. The Insurance Market and Pension Funds

*Text: Chapter 21
Aharoni, Y.: The No Risk Society (Chatham, NJ: Chatham House Publishers, 1981)
Bickelhaupt, D.: General Insurance (Homewood IL: Richard D. Irwin, 1979)
Biger, N. and Kahane, Y.: "Risk Considerations in Insurance Ratemaking" Journal of Risk and Insurance (March 1978) pp 121-32
D & G: Chapter 5
Friedman, M. and Savage, L.: "The Utility Analysis of Choices Involving Risk" in Stigler and Boulding (eds.) AEA Readings in Price Theory (Homewood, IL: Richard D. Irwin, 1952) pp. 57-96
Ippolito, R.: "The Effects of Price Regulation in the Automobile Insurance Industry: JLE (April 1979)
Landes, E.: "Insurance, Liability, and Accidents" JLE (April 1982)
Lloyds of London, a movie starring Tyrone Power (1940)
Joskow, P.: "Cartels, Competition, and Regulation in the Property-Liability Insurance Industry" Bell Journal (Autumn 1973)
Tepper, I.: "Risk vs. Return in Pension Fund Investment" Harvard Business Review (March/April 1977) pp. 100-07

V. The Market for Real Estate

*Text: Chapters 14, 25 and 26 (web content)
*Glaeser, Edward; Joseph Gyourko, Raven Saks, "Why is Manhattan So Expensive?  Regulation and the Rise in Housing Prices", JLE (Oct. 2005)
Brunnermeier, M.: "Deciphering the Liquidity and Credit Crunch 2007-08",  Journal of Economic Perspectives, v. 23 pp. 77-100 (Winter 2009)
Yellen, J.: "The Financial Markets, Housing, and the Economy" (Federal Reserve Bank of San Francisco, April 18, 2008)
Arcelus, F. and Meltzer, A.: "The Market for Housing Services" JMCB (February 1973)
Brunner, K. (ed.): Government Credit Allocation: Where Do We Go From Here? (San Francisco: Institute for Contemporary Studies, 1975)
D & G: Chapter 12
Haney, R.: "An Empirical Investigation of the Relative Attractiveness of the GNMA Pass-Through Security" Quarterly Review of Economics and Business (Winter 1976) pp. 79-89
McConnell, H.: "Mortgage Company Bids on the GNMA Auction" Journal of Bank Research (Winter 1977) pp. 294-302
Thurow, L.: "Proposals for Rechanneling Funds to Meet Social Priorities" in Policies for a More Competitive Financial Sector (Federal Reserve Bank of Boston, 1972)

VI. The Markets for Debt and Equity

A. Introduction
*Text:  Chapter 22

Second Examination (November 10, 2011)

B. The Markets for Private Debt

*Text: Chapter 12
Feder, G. and Knud, R.: "Risk Assessment and Risk Premiums in the Eurodollar Market" JF (June 1982) pp. 679-91
Fisher, I.: The Theory of Interest (New York: Augusts Kelly, 1970)
Fisher, L.: "Determinants of Risk Premiums on Corporate Bonds" Journal of Political Economy (June 1959) pp. 217-37
Sharpe: Chapter 12, 13, and pp. 87-109
West, R.: "An Alternative Approach to Predicting Corporate Bond Ratings" Journal of Accounting Research (Spring 1970)
Wood, J.: "Expectations and the Demand for Bonds" AER (September 1969) pp.Ý522-30

C. The Markets for Equities (new and existing)

*Text: Chapter 13
Malkiel, B.:  "The Efficient Market Hypothesis and Its Critics", (Princeton Working Paper 91, 2003)
Malkiel, B." "Reflections on the Efficient Markets Hypothesis: 30 Years Later", The Financial Review 40(2005), pp. 1-9
Fama, E. and K. French: "Dissecting Anomalies" CRSP Working Paper (2008)
Lo, A.: "The Efficient Markets Hypothesis" (Palgrave Dictionary, 2007)
Gombers, P; J. Ishil; A. Metrick: "Extreme Governance: An Analysis of Dual Class Companies in the United States" Review of Financial Studies 23 (2010), pp. 1051-88.
Duffy, D. and D. Marchall:  "Whither the Stock Market?" (Federal Reserve Bank of Chicago, August 1998)
Jarrel, G.: "The Economic Effects of Federal Regulation on the Market for New Security Issues" JLE (December 1981)
Logue, D. and Jarrow, R.: "Negotiated vs. Competitive Bidding in the Sale of Securities..." Financial Management (Autumn 1978)
Hansen, R. and N. Khanna: "Negotiation with a Single Syndicate May be Preferable", Journal of Business, 67 (July 1994)
Marsh, P.: "Equity Rights Issues..." JF (September 1979)
Moore, T.: "Stock Market Margin Requirements" Journal of Political Economy (April 1966)
P & S: Chapters 6, 10, 11
Sharpe: Chapters 15 and 16
Smith, C.: "Alternative Methods for Raising Capital",  Journal of Financial Economics (December 1977)

VII. Futures, Options, and Financial Derivatives

*Text: Chapters 13, 14
Mayo, Herbert: Investments: An Introduction (Chicago: Dryden Press, 1984) Chapter 23.
Fama, E.: "Forward Rates as Predictors of Future Spot Rates" Journal of Financial Economics (June 1976) pp. 361-77
Sharpe: Chapters 18 and 19
Stoll, H. and R. Whaley: Futures and Options (Cincinnati: Southwestern Publishers, 1993)
Welch, W.: Strategies for Put and Call Options Trading (Cambridge, MA: Winthrop Publishers, 1982)

 

Final Examination:

December 14, 2011
2:00pm