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Behavioral Finance

Behavioral Finance. Economics 437. Final Exam Friday 2PM May 3 rd in Chem Lecture Hall. 2 PM to 5 PM (should take 1 ½ to 2 hours for most students) Comprehensive: 40 – 50 percent on material since the 2 nd mid term

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Behavioral Finance

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  1. Behavioral Finance Economics 437

  2. Final Exam Friday 2PM May 3rd in Chem Lecture Hall • 2 PM to 5 PM (should take 1 ½ to 2 hours for most students) • Comprehensive: 40 – 50 percent on material since the 2nd mid term • Format similar to mid term exam format ( 2 to 5 more questions than a typical mid term)

  3. What is EMH? • Three Definitions: • Prices “capture” all relevant information • Fama’s three definitions: weak, semi-strong, strong • Martingale • All three are, more or less, the same

  4. The Efficient Market Hypothesis(EMH) • Price captures all relevant information • Modern version based upon “No Arbitrage” assumption • Why do we care? • Implications • Only new information effects prices • Publicly known information has no value • Investors should “index” • Allocation efficiency

  5. Definition of EMH (Eugene Fama’s Definition) from Shleifer’s Chapter One • Weak Hypothesis: past prices and returns are irrelevant • Semi-Strong Hypothesis: all publicly known information is irrelevant • Strong Hypothesis: public and private information is irrelevant

  6. Random Walk Around a Rising Trend (This is a martingale with trend subtracted out) 2 1 time

  7. Modern Finance Assumes • Stock Prices (Adjusted) Follow a Martingale Process • This is the definition of EMH in the modern finance literature • Also known as “random walk”

  8. Noise Trader Theory (mainly Shleifer, etal) • Shleifer, Etal • Definition of “agents” • Definition of assets • Conclusions

  9. Anomalies • Biases, Heuristics • Status Quo, Endowment, Saliency, Mental Accounting, Framing • Loss Aversion (prospect theory)

  10. Serial Correlation • Fama-French and DeBondt-Thaler • Jegadeesh-Titman • Calendar Effects

  11. Other • Corporate Governance • Equity Premium Puzzle

  12. The End

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