Financial economics/Glossary

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Glossary of terms related to Financial economics.

(For definitions not shown below, see the economics glossary [1])


  • Agency cost [r]: The cost to the owners (or company shareholders) of an organisation of actions by their agents (or the company management) that are contrary to the owners' interests - and the cost of attempting to prevent such actions. [e]
  • Arbitrage [r]: transactions to take advantage of a price differences of a product in different markets by buying where it is cheap and selling where it is dear. The possibility of arbitrage often prevents the occurrence of price differences. [e]
  • Basel I & Basel II [r]: international banking regulations put forth by the Basel Committee on Bank Supervision of the Bank for International Settlements requiring banks' minimum capital adequacy ratios to be related to the riskiness of their loans. [e]
  • Beta [r]: A measure of the degree to which the rate of return of a share tracks that of the equity market as a whole (defined as the covariance between the share's rate of return and the average market rate, divided by the variance of the market rate). If beta = 1 the share's rate of return moves in line with the market rate; if it is negative, it falls when the market rate rises. [e]
  • Bubble (economics) [r]: A surge in prices that raises expectations of further increases, so generating further increases: a process that continues until confidence falters, the bubble "bursts" and prices rapidly revert to an objectively-based level. [e]
  • Capital adequacy ratio [r]: The ratio of a bank's capital to its risk weighted credit exposures. May be defined in terms of tier 1 (core) or tier 2 capital. [e]
  • CDO [r]: Collateralised Debt Obligation. A portfolio of corporate bonds, grouped into tranches that are ranked by estimated risk. [e]
  • CDS [r]: Credit-Default Swap. An insurance agreement that guarantees protection against a bond default in return for a fee. [e]
  • Central Bank [r]: A government agency that is responsible for monetary policy and the support of the banking system (for example the Federal Reserve Board and the Bank of England). Usually responsible for controlling a country's monetary policy and preserving the value of its currency. [e]
  • Corporation [r]: Please do not use this term in your topic list, because there is no single article for it. Please substitute a more precise term. See Corporation (disambiguation) for a list of available, more precise, topics. Please add a new usage if needed.
  • Cost_of_capital [r]: The weighted average of the rates of return paid by a company on its equity (share issue) and on its debt (bonds and commercial borrowing). [e]
  • Covariance [r]: A statistical parameter that indicates whether two random variables show a related linear trend. [e]
  • Currency mismatch [r]: The situation created when a government's bond issue is denominated in terms of a foreign currency so that the cost of serving it varies with the exchange rate. [e]


  • Debt_instrument [r]: A formal obligation assumed by a borrower to replay the lender in accordance with the terms of an agreement, including bonds, debentures, promissory notes, leases and mortgages. [e]
  • Debt intolerance [r]: The attitude of investors to a country's bond issue arising from a belief that the country in question is more likely than other equally indebted countries to default on the servicing of their public debt, as a result of which the market- determined discount rate on that country's bonds is increased to an extent known as a risk premium. [e]
  • Derivative [r]: An asset whose value depends upon the expected value of another asset. [e]
  • Discount_rate [r]: (i) The percentage by which current value exceeds value in a year's time. (ii) The rate at which banks may borrow at their central bank's discount window. [e]
  • Discount window [r]: A facility provided by central banks that enables a bank to make secured short-term loans at its central bank's discount rate. [e]
  • Dividend discount model [r]: The value of a share is (definitionally) equal to the total of its discounted future dividend payments. [e]
  • Financial_Intermediary [r]: A go-between organisation that obtains finance from investors (or savers) and lends it to corporations (or other borrowers). Financial intermediaries include banks, building societies (or savings and loans associations) , life insurance companies and credit unions. [e]
  • Financial_regulator [r]: The United States Securities and Exchange Commission gives as its mission "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation". Financial regulators in other countries have similar responsibilities. [e]


  • Gearing: see Leverage
  • Hedging [r]: Protecting against price changes by simultaneously buying(/selling) an asset and making a futures contract to sell(/buy) it. [e]
  • Herding (banking) [r]: A tendency to base decisions upon the actions of others - on the part of bankers, depositors or investors see also Panic (banking). [e]
  • Interest rate [r]: The difference between the present and future value of money, expressed as a percentage of current value. [e]
  • Leverage [r]: (i) The use of borrowing to increase the amount of money that is available for investment or consumption. (ii) A proportional measure of indebtedness, such as the ratio of a company's debt to its shareholders' equity (the same as British "gearing"), or the ratio of the indebtedness of a household to the net value of its assets (ie net of its debts). [e]
  • Liquidity [r]: (i) The quantity of available assets in its possession that an organisation could rapidly exchange for cash (assets that cannot be exchanged for cash at a particular time are considered to be "illiquid" at that time); (ii) the funding that is unconditionally available to settle claims through monetary authorities (termed "official liquidity"). [e]


  • Moral hazard [r]: Motivation to take an otherwise unwarranted risk because the cost of an unfavourable outcome would be borne by someone other than the risk-taker. [e]
  • Noise_traders [r]: Traders who buy or sell shares for reasons unconnected with information about the issuing companies or the markets in which they operate. [e]
  • Option [r]: A right, but not an obligation, to buy (or to sell) an asset, usually at a stipulated price (termed the "exercise price") and at a stipulated time. An option to buy is called a "call option" and an option to sell is called a "put option". [e]
  • Original sin (economics) [r]: The inability of a country to borrow abroad in its own currency (a restraint upon most developing countries). [e]
  • Panic (banking) [r]: A fear of default that creates a generalised reluctance to grant credit. [e]
  • Portfolio insurance [r]: A way of protecting a portfolio against market risk by selling short on the share index futures market, or by buying put options on the share index. [e]
  • Prime rate [r]: The interest rate that commercial banks charge for loans involving the lowest risk of default - such as loans to large companies. [e]


  • Reserve ratio [r]: The ratio of a bank's reserves to its deposits, a minimum value of which is set by its central bank with the effect of limiting the proportion of its deposits that the bank is permitted to lend. [e]
  • Risk premium [r]: The ratio of the rate of return from an asset to the rate of return available from a risk-free investment. [e]
  • Securitisation [r]: The conversion of a cash flow into a marketable security (usually a claim upon debt repayments) and often categorised according to the expected risk of default (examples include collateralised debt obligations and structured investment vehicles.) [e]
  • Selling short [r]: Selling borrowed stock in the expectation that its price will fall, and with the intention of subsequently buying it back and returning it. [e]
  • Standard deviation [r]: A statistical measure for the fluctuation of a random variable about its mean value (the square root of the variance). [e]
  • Stop loss [r]: An investment policy which requires the automatic sale of a stock if its price falls by a predetermined percentage (see noise trading). [e]
  • Subprime lending [r]: Lending at interest rates above the prime rate because of an above-minimal risk of default. [e]
  • Swap: see CDS
  • Value at risk [r]: The maximum possible loss in the value of an asset within a given time span and at a given confidence level. [e]
  • Variance [r]: A statistical measure of the variability of a random quantity (defined as the mean squared deviation from the mean value). [e]