Modern Financial Systems : Theory and Applications

by Neave, Edwin H.

• ISBN13: 9780470419731
• ISBN10: 0470419733
• Format: Hardcover
• Copyright: 2009-12-09
• Publisher: Wiley

Summary

This book offers a unified theory of financial system activity. Neave distills a large body of literature on financial systems, the institutions that comprise the systems, and the economic impacts of the systems' operation, and brings them together here in one comprehensive treatment. With non-technical summaries, Neave provides readers with a primer on how financial systems work, as well as how the many parts of any financial system relate to each other. He does so in a straightforward manner, with emphases on overview, economic principles, and relations between different aspects of financial system activity. In general, Neave discusses financial governance at great length here and explains how financial markets and financial institutions complement each other, both in theory and in practice.

Author Biography

Edwin H. Neave, PhD, is a former departmental editor of finance for Management Science. He has written more than fifty articles and fifteen books focusing on asset pricing, derivatives pricing, financial system theory, and financial system practice. Neave is the sole academic who is an Honorary Fellow of the Institute of Canadian Bankers, and his banking education programs are currently used in more than forty countries. Neave has held positions as associate professor, Northwestern University; Bank of Montreal Professor of Business and Finance, School of Business, Queen's University; as well as director, Queen's Financial Economics, and professor of economics, both at Queen's University.

Table of Contents

Preface	p. XV
Theoretical Overview	p. 1
Introduction	p. 3
Aims and Approach	p. 4
Importance of Financial System Analysis	p. 5
Differences among Financial Systems: Overview	p. 7
Functions and Governance	p. 9
Financial System Organization	p. 10
Financial System Change	p. 11
References	p. 12
Terms	p. 12
Financial System Functions	p. 15
Introduction	p. 16
Clearing and Settling Payments	p. 16
Pooling Resources	p. 18
Transferring Resources	p. 20
Managing Risks	p. 21
Information Production	p. 24
Managing Incentives	p. 25
Functional-Structural Approach	p. 25
References	p. 26
Terms	p. 27
Financial System Governance	p. 29
Introduction	p. 30
Governance Mechanisms	p. 33
Types of Deals	p. 37
Alignment	p. 42
Financial System Organization	p. 49
References	p. 53
Terms	p. 54
Financial System Organization and Change	p. 57
Trends in Providing Financial Services	p. 58
Profit Opportunities and Change	p. 62
References	p. 67
Market versus Nonmarket Governance	p. 69
Market Governance	p. 71
Functions of Markets	p. 72
Descriptive and Economic Characteristics	p. 74
Market Efficiency	p. 77
Information Production	p. 79
Liquidity	p. 80
Securitization of Illiquid Asset Portfolios	p. 80
References	p. 84
Terms	p. 84
Intermediation and Internal Governance	p. 87
Intermediaries and Value Creation	p. 88
Intermediaries and Liquidity	p. 92
Information Sharing	p. 99
Delegated Monitoring	p. 104
Intermediary Information Processing	p. 105
Internal Governance	p. 110
References	p. 115
Intermediary Information Processing: Result Derivations	p. 115
Formal Statement of Problem	p. 122
Terms of Deals	p. 125
Costs of Deals	p. 126
Informational Conditions	p. 128
Moral Hazard	p. 135
Complete Contracts	p. 140
Incomplete Contracts: Introduction	p. 142
Incomplete Contracts: Further Comments	p. 148
References	p. 151
Asset Prices and Market Relations	p. 153
Pricing Stocks and Bonds	p. 155
Profit-Seeking Eliminates Arbitrage Opportunities	p. 156
Pricing Securities Relative to Each Other	p. 158
Calculating Risk-Neutral Probability Measures	p. 159
Using Risk-Neutral Probabilities for Securities Valuation	p. 162
Debt versus Equity	p. 164
Application: Bond Valuation and Market Risk	p. 168
References	p. 177
Terms	p. 177
Pricing Derivatives by Arbitrage	p. 179
Introduction	p. 180
Forwards	p. 180
Options	p. 186
Debt, Equity, and Options	p. 196
Futures	p. 197
Valuing a Credit Default Swap	p. 204
References	p. 205
Markets with Impediments to Arbitrage	p. 207
Securities Markets and Liquidity	p. 208
Market Segmentation	p. 219
Consequences of Segmentation	p. 221
Informational Asymmetries and Credit Market Equilibriums	p. 222
Market Failure	p. 230
Financial System Externalities	p. 230
References	p. 232
Applications: Market Activity	p. 233
Securities, Bond and Mortgage Markets	p. 235
Economic Differences among Markets	p. 235
Money Market	p. 237
Equity Markets	p. 241
Bond Markets	p. 250
Residential Mortgage Markets	p. 258
References	p. 264
Terms	p. 265
Markets for Trading Risks	p. 267
Introduction	p. 267
Options Markets	p. 271
Futures Markets	p. 275
Market Evolution	p. 279
References	p. 285
Terms	p. 286
Exchange Rates and Markets	p. 287
Introduction	p. 287
Exchange Rate Relations	p. 288
Foreign Exchange Markets	p. 294
Exchange Risk Management	p. 298
Exchange Rate Management	p. 300
References	p. 305
Terms	p. 306
Applications: Pooled Investments	p. 307
Marketable Securities Portfolios	p. 309
Introduction	p. 309
Managing Portfolio Return	p. 321
Mutual Funds	p. 329
Hedge Funds	p. 334
Value at Risk	p. 336
References	p. 337
Terms	p. 338
Nonmarketable Securities Portfolios	p. 339
Characteristics of Illiquid Portfolios	p. 339
Managing Earnings Risk	p. 343
Managing Closely Held Investments	p. 348
Securitization and Governance	p. 350
Mortgage Pools	p. 351
Default Insurance	p. 355
References	p. 356
Terms	p. 356
Applications: Intermediation	p. 359
Principles of Intermediation	p. 361
Introduction	p. 361
A Strategic Management Model	p. 361
Economics of Intermediation	p. 369
Operating Issues	p. 374
References	p. 380
Terms	p. 380
Appendix: Traditional Model of Liquidity Management	p. 381
Management Practice: Domestic Institutions	p. 383
Banks	p. 383
Investment Banks	p. 387
Near-Banks	p. 390
Insurance Companies	p. 393
Pension Funds	p. 398
Lending Intermediaries	p. 400
Venture Capital Companies	p. 402
Evolution	p. 404
References	p. 404
Terms	p. 405
International Banking and Banking Markets	p. 407
International Banking	p. 407
Investment Banking	p. 410
Financial Conglomerates	p. 412
Euromarket Activity	p. 413
References	p. 420
Terms	p. 420
Industry Organization and Regulation	p. 421
Banking Market Structure: Models and Empirical Research	p. 423
Banking under Perfect Competition	p. 424
Banking under Oligopoly	p. 426
Monopolistic Competition and the Number of Banks	p. 428
Empirical Aspects of Banking Competition	p. 431
Market Structure and Competition	p. 431
References	p. 433
Bank Runs and Systemic Risk	p. 435
Liquidity Provision and System Stability	p. 437
Deposit Insurance	p. 445
Information Production	p. 450
System Risks and Current Policy Issues	p. 452
References	p. 455
Solvency Regulations	p. 456
Closure Decisions	p. 458
Financial Activity and Capital Formation	p. 461
Adverse Selection and Credit Conditions	p. 461
Moral Hazard	p. 464
Financial Cycles	p. 470
Banks, Markets, and Economic Activity	p. 473
Equilibrium, Financial Structure, and Economic Activity	p. 477
Financial Structure and Economic Activity	p. 484
References	p. 488
Financial Regulation	p. 491
Aims and Approaches	p. 491
Industries	p. 495
Regulating International Activity	p. 500
Toward the Future	p. 504
Dealing with the Global Credit and Liquidity Crises	p. 510
References	p. 516
Terms	p. 516
Appendix: The Market Turmoil of 2007-2008	p. 517
References	p. 525
Index	p. 537
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