Lecture IV: Asset markets: market dynamics when expectations are a consideration
LECTURE IV Asset markets: market dynamics when expectations are a consideration Financial assets are intangible claims on a future stream of earnings. Examples include stocks, bonds, foreign exchange holdings, etc. Assets are distinct from commodities in that we cannot directly use or consume them. Tangible, as opposed to ﬁnancial, assets include such delightful objects such as ﬁne wine or rare paintings, are useful in consumption or display, but the market for such items is rather diﬀerent from that for ﬁnancial assets. The point is that ﬁnancial assets have no direct application in consumption as they cannot satisfy a need or a want. Rather, they represent claims on wealth, that is to say they are claims on future purchasing power (of course, the anticipation of future wealth has an impact on current consumption, but that is not the subject of this lecture). To sum up, an asset is a claim on a future stream of revenue (that might or might not take the form of a single lump-sum payment) in the event that a previously agreed upon set of conditions and qualiﬁcations are met. The reason we purchase an asset is because we believe, in light of our expectations at the time of purchase, that it represents the superior ﬂow of revenue based on our collective estimation of the inﬂuence of such variables as liquidity, the rate of return and riskiness of other assets, the riskiness of the asset, and how this asset changes the risk proﬁle...
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