Financial Economics

A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates deposits and uses the funds to transform them into loans. The job of financial intermediaries is to connect borrowers to savers. For example, A bank loan is a form of indirect…

The United States has imposed has created banking regulations to prevent unnecessary damage to confidence and liquidity in the financial system. The regulations are meant to prevent things like bank runs, credit crunches, and financial crises. Reasons for Banking Regulations in the U.S. 1. Bank Runs Bank runs occur due to fears of…

The McFadden Act (1927 – 1994) was appealed by the Riegle-Neal Interstate Banking and Branching Efficiency Act. The Act made national banks competitive against state-chartered banks by letting national banks add more branches to the extent permitted by state law. The McFadden Act specifically prohibited interstate branching by allowing each…

Risk is the uncertainty of an asset’s return over a given period of time. Risk perception is the individual judgment people make about the severity of a risk and may varies from person to person. There are three types of people when it comes to risk: 1. Risk Averse They hate to lose more than they love to win. They try to avoid taking risks as…

In financial markets, people trade financial securities, commodities, and instruments at prices that reflect supply and demand. There are two types of Financial Markets - the primary market and the secondary market. All well-developed markets have standardized financial instruments. Financial Instruments are assets (claim) for people who hold…

The Efficient Market Hypothesis (EMH) is an application of ‘Rational Expectations Theory’ where people who enter the market, use all available & relevant information to make decisions. The only caveat is that information is costly and difficult to get. This Efficient Market Hypothesis implies that stock prices reflect all available and…