On The Distance Between The Fed’s Fantasy And Economic Reality
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A general financial glossary with terms clearly defined and explained is provided on this page. It covers stocks, bonds, derivatives, market finance, corporate finance, banking, financial risk, econometrics, among others. The component of the return that is not due to systematic influences. In other words, the abnormal return is the difference between the actual return of a portfolio or a security and the return expected to result from market movements.
The return of a security over a certain period of time. Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark. Interest that has accumulated between the most recent payment and the sale of a bond or other fixed income security. At the time of sale, the buyer pays the seller the bond's price plus accrued interest. Trading system that utilizes very advanced mathematical models to make transaction decisions in the financial markets.
The programs built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock's price. Large blocks of shares are usually purchased by dividing the large share block into smaller lots and allowing the complex algorithms to decide when the smaller blocks are to be purchased.
The excess return of a security or fund on its risk adjusted performance generally compared to a benchmark index ; it can also mean the value that a fund manager is expected to add to a fund. A high value for alpha implies that the stock or fund has performed better than would have been expected given its risk. In insurance, alternative risk transfer ART methods are risk management strategies which allow to finance or transfer the risk to a re-insurer or to the financial market, through alternative carriers or through financial products.
An option which can be exercised at any time during the life of the contract between the purchase date and the expiration date.
A European option can only be exercised at its maturity. Form of contract sold by life insurance companies that guarantees a fixed or variable payment to the annuitant at some future time, usually retirement. The action of profiting without any risk from the correction of price of identical or similar financial instruments, on different markets or in different forms. Sophisticated model of the relationship between expected risk and expected return. The model is grounded in the theory of absence of arbitrage.
It says that the return on an asset is equal to the risk-free return plus a collection for risk premiums, associated with specific risk factors.
Developed by the famous economist Robert F. Engle, ARCH models are used to model financial time series with time-varying volatility, such as stock prices. This type of models assumes that the variance of the current error term is related to the size of the previous periods' error terms, giving rise to volatility clustering. Price at which a security or commodity is offered for sale on an exchange or in the over-the-counter market. Generally, it is the lowest round lot price at which a dealer will sell.
A situation where certain values of variables tend to occur at irregular frequencies and the mean, median, and mode will occur at different points. This is said to exhibit skewness. Qualitatively, a negative skew indicates that the tail on the left side of the probability density function is longer than the right side and the bulk of the values lie to the right of the mean. A positive skew indicates that the tail on the right side is longer than the left side and the bulk of the values lie to the left of the mean.
Conversely, a symmetric distribution, when depicted on a graph, will be shaped like a bell curve and the two sides of the graph will be symmetrical. Investment return data typically has an asymmetric distribution.
An option is said to be at the money when the exercise price or strike price is the same as that of the underlying instrument. For a call option, when the option's strike price is below the market price of the underlying asset. For a put option, when the strike price is above the market price of the underlying asset. The validation of a model by feeding it historical data and comparing the model's results with historic reality.
The process of comparing model predictions with actual experience. One limitation is that it is often possible to find a model that would have worked well in the past, but will not work well in the future. Pricing structure in commodities or foreign-exchange trading in which deliveries in the near future have higher price than those made later on.
Backwardation occurs when demand is greater in the near future. A government owned entity that takes over and liquidates toxic assets from failed or declining financial institutions to leave them with a clean balance sheet. The strategy was last used during the Savings and Loan crisis of s where this entity was called the Resolution Trust Corporation.
A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year.
A quantitative summary of a company's financial condition at a point in time, including assets, liabilities and net worth. The distress or failure of a large bank is more likely to damage confidence in the financial system as a whole.
Size is therefore a key measure of systemic importance. A series of unexpected cash withdrawals caused by a sudden decline in depositor confidence or fear that the bank will be closed by the chartering agency, i.
Since the cash reserve a bank keeps on hand is only a small fraction of its deposits, a large number of withdrawals in a short period of time can deplete available cash and force the bank to close and possibly go out of business. A short-term credit investment created by a nonfinancial firm and guaranteed by a bank as to payment. Acceptances are traded at discounts to face value in the secondary market. These instruments have been a popular investment for money market funds.
They are commonly used in international transactions. Inability to pay debts. In bankruptcy of a publicly owned entity, the ownership of the firm's assets is transferred from the stockholders to the bondholders.
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk. Option contracts that remain dormant until a trigger point the barrier price is reached, at which point the call or put option is activated, and results either in a long or short options position, or in the automatic exercise of an options position. These are exotic options. Unexpected changes in the basis between the placing and the lifting of a hedge.
Basis risk is in excess of convergence. A credit derivative contract that provides a payoff when any of the multiple reference entities default. The contract specifies the number of defaults after which the payoff is generated, based on which the instrument is classified as first-to-default CDS, second-to-default CDS or more generally nth-to-default CDS. It is a probabilistic model see also Graph that represents a set of random variables and their conditional dependence structure with a set of nodes and edges which forms a directed acyclic graph DAG.
The nodes that are not connected by an edge represent variables that are conditionally independent of each other. Any market in which prices exhibit a declining trend. The beta measures the sensitivity of an asset or fund to market movements generally a benchmark. A beta below 1 can indicate either an investment with lower volatility than the market, or a volatile investment whose price movements are not highly correlated with the market.
A beta above one generally means both that the asset is volatile and tends to move up and down with the market. An option that pays out a fixed amount if the underlying financial instrument on which it is based reaches the strike price either at expiry, or at any time during the life of the option. Also called an all-or-nothing option, digital option or one-touch option. Model developed by Fisher Black and Myron Scholes to gauge whether option contracts are fairly valued.
The model incorporates such factors as the volatility of a security's return, the level of interest rates, the relationship of the underlying stock's price to the strike price of the option, and the time to maturity. Wholesale trading that allows traders to buy or sell very large numbers of securities bilaterally outside exchanges or electronic markets. Because block trading is typically between two parties, often between institutional investors and facilitated by an investment bank, prices are set with certainty and execution is done without delay.
It avoids the sale or purchase of very large number of securities having too much undesired impact on the price. Common stock of a nationally known company that has a long record of profit growth and dividend payment and a reputation for quality management, products, and services. Blue chip stocks typically are relatively high priced and low yielding. A bond is a debt instrument by which a government or company or other entity borrows money from an investor binary option and us trading clients a defined period of time at a fixed interest rate.
The height of the interest rate is now determined by the market based on the perceived riskiness of the entity.
Bonds are used by companies, municipalities, states and governments to finance a variety of projects and activities. Bonds can be resold on a secondary market. Brownian motion or Wiener process refers to the random motion of particles suspended in a fluid resulting from their collision with the quick atoms or molecules in the fluid. Brownian motion is among the simplest of the continuous-time stochastic processes.
It is used in mathematical finance to model the evolution of stock prices. Speculative or market bubbles occur when prices rise far higher than can be justified by fundamentals and for no other reason than that investors believe that something bought today can be sold at a higher price in the future. Bubbles can occur in any tradable item or instrument, from tech stocks to works of art. The term is used because, like a bubble, the prices will reach a point at which they pop and collapse violently.
Prolonged rise in the prices of stocks, bonds or commodities. Bull markets usually last at least a few months and are characterized by high volume trading.
An option that gives the holder or buyer the right but not the obligation to buy an underlying instrument at an agreed price or strike price within a specified time. The seller or writer has the obligation to sell the underlying instrument if the holder exercises the option. A cap also known as interest rate cap refers to a series of European interest call options called capletswith a particular interest rate, each of which expire on the date the floating loan rate will be reset.
At each interest payment date the holder decides whether to exercise or let that particular option expire. In a cap, the seller agrees to compensate the buyer for the amount by which an underlying short-term rate exceeds a specified rate on a series of dates during the life of the contract. Caps are used often by borrowers in order to hedge against floating rate risk. The model is grounded in the theory that investors demand higher returns for higher risks.
It says that the return on an asset is equal to the risk-free return plus a risk premium. This way the bank can cover defaults on loans and not go bankrupt when too many borrowers default. Basel II not only sets the amount of capital reserves, but also regulates how banks should calculate the risks of the loan for which capital reserves are needed, and describes how supervisors should deal with the Basel II regime.