Summary FIN 421 / FIN421 Lecture 1: Financial Markets FIN 421 – Fall 2020 Professor Michael Barnett

Lecture 1: Financial Markets FIN 421 – Fall 2020 Professor Michael Barnett Outline 1 The finance industry 2 Types and characteristics of financial assets 3 Trading basics 2 / 30The Financial System 3 / 30Basic Functions of the Financial System Financial assets contribute indirectly to the productive capacity of the economy by providing: • Effcient allocation of funds. • Consumption timing (saving for retirement, college borrowing, buying a house) • ’Good ideas’ are able to attract funds for investment • Effcient risk sharing. • Entrepreneur wants to diversify • Managers with cyclical labor income may prefer assets with countercyclical returns to offset their income risk • Professors with acyclical labor income can hold cyclical stocks • Effcient separation of ownership and management. • Implementing good business ideas requires external funds • Growth often requires external funds 4 / 30Growth of Financial Services in the U.S. Source: Greenwood and Scharfstein (2013) 5 / 30• Financial services industry has experienced enormous growth • 2.8% of GDP in 1950, 4.9% in 1980, 8.3% in 2006 • In 1980, the typical financial services employee earned about the same wages as his counterpart in other industries • By 2006, employees in financial services earned an average of 70% more (Phillipon and Reshef, 2009) • A large fraction of growth is due to growth the fees earned in asset management • Value of all financial assets was 5x GDP in 1980, 10x GDP in 2007 • As asset values increase, fees increase as a fraction of GDP • Fraction of assets that is professionally managed increased • 25% of household equity holdings were professionally managed in 1989, 53% in 2007 6 / 3