Beruflich Dokumente
Kultur Dokumente
Oleg Shibanov
New Economic School
March, 2014
Did you bring your calculator? Did you read the chapter ahead of time?
Market Imperfections
March, 2014
1 / 34
Maintained Assumptions
Market Imperfections
March, 2014
2 / 34
Judge:
I
Market Imperfections
March, 2014
3 / 34
Market Imperfections
March, 2014
4 / 34
Market Imperfections
March, 2014
5 / 34
The lender may believe a startup project is no good and demand 50%,
expecting to get only 25%.
The entrepreneur himself may believe the startup project is great and think
25% is fair. He may believe that the lender would get an expected rate of
return of 50% at the lenders quoted rate.
Market Imperfections
March, 2014
6 / 34
A sole bank will exploit the monopoly power by asking for higher loan rates and
lower investment rates.
No investor, lender, or product must be unique. No investor plays a dierent role.
Investors are substitutable for one another. Or, there are many plenty of each type.
Note that this assumption also makes sure that you get nothing from waiting for
another buyer. There is an innite number of buyers already present.
Market Imperfections
March, 2014
7 / 34
To administer a loan, the bank must charge a higher interest to recover its
operating costs, too. So, the lending rate is again lower than the borrowing rate.
Note that the current holder may be better o not selling because the transaction
cost penalty may eat up too much. Thus, it becomes more valuable for the
current owner to stay the owner.
Market Imperfections
March, 2014
8 / 34
Market Imperfections
March, 2014
9 / 34
NOTHING.
Ination is not a market imperfection, so the borrowing and lending rates may
both be higher in the presence of ination, but there will be no extra wedge here.
HOWEVER, higher unexpected ination usually means more volatile ination, and
thus borrowing rates may increase more than lending rates because the bank
considers ination as a friction.
(Note: ination targeting by Central Banks)
Market Imperfections
March, 2014
10 / 34
Borrowing rates usually become higher than lending (savings) rates. They are no
longer assured to be the same.
These assumptions may be overkill, but they are denitely sucient. We
sometimes lean heavily on one or all of them; sometimes we dont need to lean on
one or the otheror even most of themvery heavily.
Market Imperfections
March, 2014
11 / 34
Market Imperfections
March, 2014
12 / 34
Yes. As the current owner, you may be better o staying the owner, because the
project is worth more to you than it is to the potential buyers.
An example follows.
Market Imperfections
March, 2014
13 / 34
Market Imperfections
March, 2014
14 / 34
Market Imperfections
March, 2014
15 / 34
Market Imperfections
March, 2014
16 / 34
Market Imperfections
March, 2014
17 / 34
Market Imperfections
March, 2014
18 / 34
There is no unique value anymore. The project value now depends on your wealth.
It could be anything between $1, 000/1.01 = $990.10 and
$1, 000/1.10 = $909.09, depending on how much money you have.
Market Imperfections
March, 2014
19 / 34
If project value depends on who owns it, then what can nance tell you about
the world? That projects cost whatever they may cost?
Market Imperfections
March, 2014
20 / 34
Identical interest rates (perfect markets) mean that project values do not
depend on how much wealth the project owners have.
Market Imperfections
March, 2014
21 / 34
Is the value of an object always its price (what you can sell
the object for)?
Market Imperfections
March, 2014
22 / 34
It is not is this market perfect but to what extent is this market perfect?
Market Imperfections
March, 2014
23 / 34
Market Imperfections
March, 2014
24 / 34
No, it is not bad news. You can talk about buyer and seller surplus! Perhaps
discuss infra-marginal. I like the example of being able to buy gas when you run
out of it and value it at $10/litre.
The social value and surplus from trading in a perfect market is not zero.
Market Imperfections
March, 2014
25 / 34
With uncertainty, in the real world, rms with a lot of uncertainty tend to
suer
I
I
I
I
I
Small rms suer a full syndrome, not just one symptom Dicult to sort
out real-world spreads into determinants.
Market Imperfections
March, 2014
26 / 34
For example, almost all entrepreneurs believe that they will succeedan
opinion. But they are also overcondent, and thus objectively often bad risks.
The fact that they have to pay higher quoted (promised) costs of capital thus
may often reect default risk, not just market imperfections.
For example, Boston Celtics = 9.4%, whereas Treasury = 5.6%. The 3.8%
dierence is not primarily an expected rate of return that is higher. On average
(over many rms like the Celtics), such bonds will probably pay around 6%.
Market Imperfections
March, 2014
27 / 34
Covenants and Collateral mechanisms to let each party that is more optimistic
take more of each part of the risk.
Market Imperfections
March, 2014
28 / 34
Transaction Costs
When you buy a house, the seller pays the realtor agents a commission,
nowadays about 5% of the value of the house. (There is another 1% in
various transaction costs.)
I
This does not mean that, as a buyer, you are not implicitly paying for this,
too. If the seller did not have to pay this commission, the seller would accept
a lower price.
In terms of value-at-risk, i.e., as a fraction of the equity that is your own given
standard 80% nancing, this transaction cost eats up more than 25% of your
equity investment the moment you close.
Market Imperfections
March, 2014
29 / 34
Direct costs may be around 20 basis points on well-executed orders that trade $1
million in a liquid stock like PepsiCo, including the price impact. The indirect
costs are often trivial, toomaybe $20.
You can think of this $1 million as just the equity portion. PepsiCo carries loans,
just like your house does.
Market Imperfections
March, 2014
30 / 34
Market Imperfections
March, 2014
31 / 34
If you run a fund, make some of your money through liquidity provisionbut
do not go overboard, or you will end up bankrupt.
Market Imperfections
March, 2014
32 / 34
Market Imperfections
March, 2014
33 / 34
Market Imperfections
March, 2014
34 / 34