Financial Markets and Institutions

Much of this is in Appendix 1: Portfolio theory.
We try to ‘make sense of’ financial activity from the economist’s perspective. Thus, we go to some lengths to show how financial activity has its origins in the real economy and in the need to lend and to borrow to enable real investment to take place. Similarly, when we talk about the shortcomings of financial markets and institutions, we are concerned with the effects that these shortcomings have on the functioning of the real economy. We have not produced a consumers’ guide to financial products and services. Financial advisers, both actual and potential, should find much of interest here, but it is not a guide to financial products and services. Because we want students to understand the events which they will come across, we have made frequent use of material from the Financial Times and from readily available statistical sources. We have gone to some pains to explain how to interpret the data from such sources. We hope this will encourage some students to update the evidence we have provided.
In preparing this latest edition, we have taken the opportunity to update figures and tables and to replace older with more recent illustrations. In response to readers’ comments we have also added a new chapter on the malfunctioning of the financial system (Chapter 12) and we have restructured Chapter 6 in order to treat the pricing of bonds and equities separately.