Modern Financial Investment Statistical Analysis

Author: Li Lasheng, Zhai Shuping, Cui Yeqiu / Country: Mainland China
Publisher:
Publish Date: 2004-12-01
Features: [Excerpt:] The term "finance" refers to the mobilization of capital formed by money, credit, and banks. It has become a branch of economics with different centers and methodologies. Its fundamental center is the operation of capital markets, the supply and pricing of capital assets. Its methodology involves using substitutes to price financial contracts and instruments. This approach is particularly suitable for valuing financial instruments with time-continuous income streams under uncertainty.
From the definition of finance, money serves as a measure of the volume of financial transactions and acts as the "blood" of economic activity, lubricating economic operations. In traditional terms, money, as a general equivalent, has fundamental functions such as a value measure, medium of exchange, and store of value. Early money, as a value measure, had a unified intrinsic value, with the weight of the same purity of precious metals serving as an objective standard, eliminating uncertainty in accepting money. The emergence of credit led to a discrepancy between the value of money and its intrinsic value, introducing uncertainty into financial activities. However, the corresponding legal tender status and the gold exchange standard system ensured that credit transactions remained consistent in actual value, thereby not disrupting the stability of financial operations. Financial variables still exhibited high determinacy. Meanwhile, the function of money as a medium of exchange was greatly strengthened.
However, once money detached from its physical foundation, credit began to assume a foundational role. As a result, the quantity of money based on credit became uncertain. For example, if you hold a certain amount of debt, how much actual money or value will you receive is fundamentally unclear. If the debtor fulfills their obligations on time, you may receive a certain amount of money; if they fail to do so, you may receive nothing; if they only partially fulfill their obligations, you will only receive a portion of the corresponding amount. The actual outcome can only be known after the due date. In this case, the value of a certain amount of debt becomes uncertain.
The emergence of credit-based monetary systems maximized the function of the medium of exchange while causing the value measure to lack a unified standard. Different people may make inconsistent judgments based on their preferences, resulting in the same amount of money being perceived as having different values, or the same level of economic goods being evaluated differently by different people in terms of money quantity. Since people's value judgments are partly influenced by the objective economic environment they face, as well as the direction and level of expectations, and since there are no completely repeated environmental conditions in the economy, judgments made by individuals based on their preferences at different times and under different circumstances are inherently inconsistent. The inconsistency of individual judgments and the lack of uniformity in collective judgments make money, as a value measure, inherently uncertain in its evaluation of value.
From the perspective of banking operations, deposit and loan businesses have always been the most fundamental operations of commercial banks. Regarding deposits, their funds primarily come from enterprises and residents, with a portion also from government sources. Under normal circumstances, whether enterprises or residents, when they have temporarily idle funds, they deposit them in banks. In other words, the deposits absorbed by banks are mostly temporarily idle funds of economic entities in their economic activities. The nature of these idle funds determines the temporal uncertainty of bank deposits, as depositors themselves do not know when their idle funds will be used. Naturally, the banks that operate deposit businesses also do not know when depositors will withdraw funds or how much they will withdraw. In other words, most of the deposits operated by banks are short-term idle funds, and the period is uncertain.
Regarding loans, commercial banks often operate medium- and long-term loans for enterprises and individuals. Even without considering default risk, banks will face the challenge of how to make short-term funding sources long-term. In other words, in the deposit and loan operations of banks, the short-term nature of funding sources and the long-term use of funds clearly exhibit inherent inconsistency in time. This inconsistency makes it difficult for banks to determine their reserve ratios, let alone optimize them. Meanwhile, the randomness of economic entities' behavior inevitably leads to uncertainty in the volume and timing of banking operations.
As the center of finance, the financial market, whether in its operation or in the market pricing of its products, exhibits even more pronounced uncertainty characteristics. This will be analyzed in detail in Section 2.