耶鲁大学金融市场英文文本Financial-MarketsLecture-22-Transcript.doc

Financial Markets: Lecture 22 Transcript Professor Robert Shiller: First thing, I wanted just to-I forgot to show-I dont know how exciting this is, but this is a ticker tape. They werent brown. This tape is about a half-century old. It came from the attic of the New York Stock Exchange. When I was at a conference there a year ago, I mentioned to the vice president there that I had told my class about ticker tape machines and they had never heard of them-didnt know what they were; well, at least some of them hadnt. So, he sent me this. This was never used, but normally it would go into a machine and it would print out stock prices at trades. I was giving a talk yesterday at the New York Stock Exchange and I met him again and I said, thank you for this; my class was happy to see it. He said, well I could have given you a whole ticker tape machine. He said, well the attic at the New York Stock Exchange was filled with them, but they finally threw them out, so its too late. I think it is-this is evidence that information technology really has dominated stock prices. We didnt really have active stock markets before the electronic age, which is an interesting thing to think about because the ticker tape machine was invented by Edison in 1867. In 1867, there were hardly any-there were stock markets, but they were very small. It was really the electronic communications that made it what it is. Its exciting to think about the future and where electronic communication is going to take markets going forward. I wanted to continue today about our futures markets. Let me just step back and think, what is a futures market? Today, Im going to talk about how it has expanded to cover lots of other things, notably financial instruments. Lets just think, what is a futures market? If you read Holbrook Working, whos on your reading list, and his half-century old paper, back in those days that he was writing, he says that the name futures is a bit misleading because that suggests that its talking about the future rather than today. If you listen to the news about any commodity price, its always talking about futures price. They dont talk about the price today. The futures price is the interesting-the point that Working made is not so much that its in the future is that its well-defined and standardized. For agricultural futures, its true that the contract doesnt mature for a month or so, but as Working points out, any contract for delivery of something has some term. They dont just deliver it instantly and Working says, there are times when the so-called spot price is actually further in the future than the futures price. If you look at the way things are traded-Im going to be talking a lot about oil, but let me just talk generally about oil. What is the price of oil and how does anybody know what it is? If you go to people who buy and sell oil, they will tell you, well we dont just sell oil; we dont just have it ready to go. Almost all of the oil is sold in long-term contracts, so an oil company will sell a contract to deliver regularly to some refinery, oil. Theyll have these tankers appear and we sign a five-year contract-or whatever-and it has all kinds of terms. If you read the contract it would be fifty pages long and it would specify all kinds of what well do if we dont deliver or what happens if we cant deliver the grade we promised. Lots of uncertainties are defined, so who knows what the price of oil is when its being part of a long-term contract. Thats why you need a futures market and the futures market is the market thats free of-it has a standardized contract. We know exactly what the price means and attention focuses on the futures market because the trade there is-everybody understands it; everyone knows exactly whats being traded. The minute-to-minute changes reflect something; they reflect something real, namely change in the market not any change in whats being delivered. Anyway, it used to be that the only futures markets were for commodities-for things-typically it was thought that futures markets are good to have for things that are not standardized-that are difficult to define. So, we want rice futures and we want wheat futures because there are so many different kinds of rice in different areas and different-so, we want to have a standardized price. There were no financial futures until the 1970s and people felt back then that we dont need futures contracts because theres a standardization of shares. Every share in a given company is exactly identical. When you say, Id like to buy a hundred shares of a company, youre not going to ask the broker, well which shares did I get? And can I look at them? Your broker would say in disbelief, look youve got shares; theyre all absolutely identical. You might think theres no need for a futures market because the prices are already standardized in the cash market. Moreover, the prices that you see traded on the stock exchange floor-you know exactly when the trade took place; theyre not future-traded. Why did we get futures markets? Let me come back to that. Let me just first-why did we get stock futures markets? Let me come back to that and talk about-lets be clear what they are. Stock index futures markets came in around 1980 and one of the very first was the Standard & Poor 500 Stock Index Futures Market traded at the Chicago Mercantile Exchange. It was a radical innovation when it came in because people thought, whats the point? I can see farmers delivering their corn or their oats or whatever, but stocks-whats the point? Well, it turned out to be absolutely right because-the CME was absolutely right to create this market because-within a few years, there was more trade on the futures market than there was on the stock market itself. Lets be clear what they created-and this is the terms of the contract as it is today. The S&P 500 is an index of stock prices produced by Standard & Poors Corporation and its-they take the prices of 500 stocks and they form a weighted average. Its an arithmetic average where the weights correspond to the amounts outstanding of the various stocks, so its a value-weighted index. Its just a number published by the American Stock Exchange-no, by Standard & Poors. All it is at-just as with agricultural futures-I dont know how clear I was about this yesterday. If you-maybe I didnt say this. Let me say that it applies to both agricultural futures and financial futures. If you want to trade in the futures market, you have to put up margin and theres a margin requirement for each contract. The margin is there to eliminate counterparty risk with other contracts. When you sign a contract with another person you have to worry whether that person will come through, but with the exchange that counterparty risk is eliminated. The way the exchange eliminates it is it takes the other side itself-of every contract who-it stands between you and the counterparty and it protects itself by demanding margin. You have to, up front, put up margin for any futures contract and the margin is settled daily. Every day, they look at your margin account and they adjust it. So, if-let me go back to wheat futures because thats the simpler-I dont think I really explained this well. If you buy-when we say buy wheat futures, what does that mean? That means-the word buy or sell has a different meaning in futures markets. When you buy wheat futures or, for that matter, S&P 500 in futures, it means that you put up margin. You did not pay the price for the contract; you only paid margin, which might be 5% or less than the price. If youre buying wheat futures, what are you doing? Youre putting up margin and standing ready to see your margin account credited or debited depending on the change in the futures price from day to day. If the price of wheat in the futures market goes up and you bought futures, they will increase your margin account by the amount that it went up. If the price of wheat goes down, they will decrease your margin account balance by that amount. How do they get the money? Well, thats because for every buyer theres a seller in the futures market, so somebody else sold futures. Both of you put up margin; if you are buying, you put up margin; if you are selling, you put up margin. So, the result is that they have a place to get the money. If the price goes up and you bought, your margin account will go up. The exchange will get the money by taking it from the margin account of the guy who sold and theyve always fixed it so that the number of buyers always equals the number of sellers. You see how the exchange cant lose and you cant lose; this is a guaranteed thing. The only problem is that what if a margin account runs dry? Both buyer and seller have put up margin and then the price-lets say the price drops a lot; the futures price drops a lot. Then, that means that the buyers margin account is wiped out. What will happen then is that the futures commission merchant will go to the person who bought the futures and say, do you want to post more margin or do you want me to close you out? That person has a decision to make and if he or she puts up more margin, then that replenishes the margin account and the person can keep trading. Thats how the exchanges eliminate counterparty risk, by daily resettlement of the contracts. Its an invention-actually goes back to Japan; although, it was slightly different in form. Its an invention that eliminates any risk of the counterparty not performing so that risk doesnt affect price. So its the same-are you clear on that now-how the margin account works? You might not enjoy this. Depends on how much of a gambling instinct for how much fun this is. If you buy or sell futures, you can expect a phone call from your broker sooner or later; well, not necessarily, unless you have incredibly good luck. Hillary Clinton, when she invested in the futures market, she had incredibly good luck. You know this story? When her husband, Bill Clinton, was Governor, she got a call from-a friend recommended to her a very good broker who knew how to trade in commodity futures. So, she put up something like $1,000 of her own money and then the broker kept calling her and asking her what she wanted to do. She just never lost anything; she turned it into a $100,000 within a year and then she stopped. We dont know why-Im not anti-Hillary Clinton; this is just a futures market story. I like her a lot, but what do you think happened there? Her margin account just kept going up, and up, and up. I mean, it went up amazingly. You could conclude that she is a brilliant trader and she ought to be President of the United States, but then the next question is, why did she stop? Why did she run it for a hundred-fold increase and stop? Does anyone have any idea? Is this common knowledge-this story? Well, the story ends there; nobody knows what happened. Futures traders are willing to exercise a guess of what happened. Does anyone have any guess what you think happened? Well, I shouldnt say things so political. I do like Hillary Clinton, but what likely happened is some futures commission merchant was thinking of bribing the Governor. Maybe he didnt-never actually did it-but lets do a little favor for his wife and then maybe I can ask him for something later. So, the futures merchant just didnt listen carefully to what she said. He just-well, he sort of cooked the books and gave her money by making it look like a trade. When she found out-what finally likely happened is someone said, do you think youre making so much money in the futures market? Remember who your husband is and this guy-do you trust him? This is a likely guess. She finally wondered, what is going on here? And she stopped because she didnt know what was happening either. Somehow money was coming in and-thats the very-now, maybe she was just very savvy in her investing ability, but usually your futures accounts go both up and down and you get margin calls. Anyway, the last day of the contract theres a settlement and-in agricultural futures, the last day theres delivery if youre still in the contract. If you are a seller on the last day, you must deliver the specified number of barrels or bushels of whatever it is. Or, if you are a buyer, you must take delivery of them. With stock futures its different because nobody expects you to deliver shares of stock. What happens on the last day is theres a final settlement and that is in dollars in this case-250 times the S&P500 Index on the last day minus the futures price of the preceding day; thats the settlement. Of course, you have been gaining the changes in the futures prices every preceding day. If you-this is what you receive as a buyer if you bought the contract and this is what you pay if you sold the contract. Everyday between the time you originally bought, youve been getting-if you were a buyer-the change in the futures price and at the end you get this. If you sum all those up-all the settlements you got since you bought the contract until the expiration of the contract-you would be getting the index at time T minus the futures when you bought. That defines it. Everyday you get the change in the futures price; those all add up into your margin account and on the last day you get this. What is it, really, youre doing? You could say-and they wouldnt like to put this way at the futures exchanges; they dont like gambling analogies, but I make gambling analogies freely in this course. Its like placing a bet on the stock market. If you think the stock market is going to go up, you buy the futures, and if you think its going to go down, you sell the futures. If you buy one contract, how much money do you get? You get, in total, over the total interval, between the purchase date and the expiration of the contract, you get the stock index minus the initial futures price you paid, times $250; thats the gamble. If you sell, its just exactly the opposite. Now, theres something called fair value and youll see this talked about a lot in futures. This is what the futures price should be; we talked about it in terms of wheat. Remember, the fair value of a wheat futures was equal to the price of wheat today times one plus the interest rate, plus the storage costs; that was the formula we had last time. That was the fair value because we concluded that somebody whos storing grain has to make their expenses, they have to make the interest cost and they have to make the storage costs, so the futures price should be equal to fair value. Its the same here with stock index futures. The fair value F of a futures contract is equal to the stock price plus the stock price times the interest rate, plus the storage cost. The storage cost for stocks is negative because it doesnt cost you anything to store a stock. Well, you dont even have to store certificates anymore; your name will be held electronically. Its negative because you get dividends. So, y is the dividend yield that you get on the stock. So r minus y is the adjustment you have to make. You see this-to get from stock price to fair value-you see this is the same formula that we had for wheat, except that you understand that storage costs for stocks are negative because they pay a dividend. So, all Ive done is Ive-the way I wrote it before was P x (1 + r + s) in the preceding lecture; now its P x (1 + r y) because s = -y. Thats the fair value of a stock index futures. Now, we said last time that sometimes prices deviate from fair value-or maybe they dont depending on how you define fair value. But, if you define fair value as 1 + r + s, where s is just the cost of a warehouse, then sometimes that formula doesnt work because we talked about last time, at the end of the growing season nobody is storing wheat anymore. So, the wheat market falls into backwardation and the futures price gets low. Other than that-normally wheat is being stored, so normally wheat prices are essentially equal to fair value, but stocks are always being stored. Theres no-it would be unusual to see backwardation in this market; it would be abnormal because were always storing stocks. Thats what we do with them is we hold them. Dividend yield-you can have backwardation, however, if the dividend yield is greater than the interest rate because then the adjustment would make the futures price below the cash price. Otherwise, you cant have backwardation in this market, so price should always equal fair value. Right now, were in an unusual circumstance where the interest rate and the dividend yield are about the same. Right now, the Fed has cut short-term interest rates-federal funds rate-to 2.25%; thats very close to the dividend yield on the S&P 500. So, at this point of time, the futures price is very close to the spot price, so fair value calculations are relatively unimportant. Are there any questions? Do you understand this? I have a clipping from-I took it from yesterdays Wall Street Journal and this is to prove that The Wall Street Journal is still publishing financial data even though theyve cut way back. This used to be a longer entry, but this is what they have as of yesterday. This says the Standard & Poor 500-this is under futures prices-Chicago Mercantile Exchange-and theyre reminding you that the settlement is 250 times the index and they show two contracts, one expiring in June and one expiring in December. These are the prices; this is the opening price at the beginning of the day; this is the highest price for the day that the contracts traded; this is the lowest price traded for the day; and this is the settled price, which is essentially the last price of the day. This is the change in the settled from the preceding day and this is the o