Seminar Report
1. Summary
1.1 Aims
With the development of economy, the investing demands of people have become more and more diversified and different levels of people in the society have different expectations and goals of investing. As a result, the lottery-type stock has emerged in the stock market and then has been increasingly prevalent, whose demand shows an upward trend. Thus, the paper that we searched aimed to illustrate the logic of the increasing prevalence of such kind of stock and find out the socioeconomic factors that have significant influence on the demand of the lottery-type stock, hoping to provide reference to price such kind of stock and predict its development in the stock market in the future. 1.2 Methodologies
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Firstly, this paper used empirical data to prove the existing of connections between personal preferences of individual investors and the portfolio choosing decision, which strongly challenged the classic portfolio choosing theory which was based on the mean-variance preferences, and provided new evidence for the irrational side of investors. The dataset this paper used was both enrich and unique, including market level, individual level and macro level, which made his argument very solid from all aspects that may involving in. Another brilliant part was that the author took one step further and investigated what constituted of lottery preference, both on micro and macro side. Both individual features and the society environment could have much influence on the stock market. The result of this paper suggested that the connections between the society environment and the stock market may be much stronger that we use to think. The paper indicated that the changing of demographics may also have impact on the stock market, which is a brand new …show more content…
Firstly, the author assumed that the lottery feature are endogenous, thus it can be represented by endogenous factors of the stock, like the skewness of return distribution, and the volatility. And when investors choose these type mainly out of personal preferences, it is an irrational behavior. However, noise may exist on this channel. Bonner et al.（2007）found that reports published by analysts with higher reputation, may increase market reaction. And we knew that individual investors lacked ways to gain information. Those reports acted as an important reference of their investment decision. Firms with high growth potential usually attracts more analysts to cover. To sum up, the high volatility may come from some exogenous reasons. And this kind of reactions con not simply be regarded as irrational. So, more control variables should be added to stock level regression model, such as earning growth and numbers of analysts covering the firm. Secondly, when discussing the component of the lottery preference, the author used several macroeconomic factors to test his hypothesis. However, the author used only one lagged order of most variables. I really doubted the model was able to capture what really happened in the real world. I think for those macroeconomic time-series factor analysis, Vector Auto-Regression model would be more appropriate. Following author’s frame, it was the
In turn everything in the present and the future is judged through the stocks as they hold a high importance in industrialized economies showing the healthiness of said countries economy. As investing discourages consumer spending over all decreases, it lead...
CAPM is standing for Capital Asset Pricing Model which helps investors to calculate investment risk and also evaluate portfolio’s rate of return. It is based on the Markowit’s mean-variance theory. Capital asset pricing model is an equilibrium model which can be used to explain the relationship between the systematic risk and the expected return of a portfolio. The capital asset includes bond, stock, securities and etc. This essay will be divided into three parts. First of all, the capital asset pricing model will be fully introduced and the components of CAPM will also be explained. In addition, it is going to illustrate the security market line(SML) which indicates the relationship between risk and expected return by graph. Secondly, the virtues of the CAPM will be empathized. What is more, it will represent the application of the CAPM in the company decision making. Thirdly, the imperfection of the CAPM will be listed. Furthermore, Fama and French’s the three factors model will be introduced.
Introduction This essay will focus on behavioral bias and evaluate the bubble and market crash in its psychological aspects. One of a famous bubble was the dot.com bubble with throughout this essay, stock market trends to begin and end with periods of frenzied buying (bubbles) or selling (crashes). The herding behavior that irrational and driven by emotion and influenced the dot com bubble and burst. This essay will expected to I, explore difference phrase of Dot.com bubble and crash in which behavioral and psychological, ii, and explore how information cascades lead to herding, confirmation bias, and overconfidence in unjustified stock valuations and how this occurred in the Dot.com Bubble and Crash. Literature review of behavioral finance
After playing the “Stock Market Game”, I have learned a lot of things from trading stocks. This is the first time I have played the “Stock Market Game”, it is actually an amazing game. It is not only the game but also the necessary lesson of economic market. I realized that this game is very hard to play if people do not have enough sensitive as well as the observation and the judgment skill. When I played this game, I was confused about how to increase my money up.
More and more acholars believe that the theory of portfolio and the assumption of CAPM model are not match with real market condition, it cannot explain the pricing of capital assets comprehensively. There are large number of empirical studies have show that, the CAPM model is incompleted, because CAPM assume that variance of β is the only factor can affect the future rate of return. However, there are other factors that influnce the pricing of capital assets are emerging, such as book value, market price ratio and so on. Among them, CAPM was seriously called into question in the 1990s by Famar Fama and Franche (1992), they highligt that “beta is dead”. In Fama and Franche’s (1992) studies, they mainly focus on the relationship between the ratio of the book value of a firm’s common stock (BE) to its market value (ME) with rate of retrun of the stock. Fama and Franche (1992) concludes that there are two related points from the research. First, they conclude that BE/ME can basically explain the changes in stock retrun and it have better explanatory power than β. Because the report clear shows that during the period from 1941 to 1990 the relationship between β and average return is weak, moreover, there virtually have no link between β and average retrun from 1963 to 1990. Second, although CAPM model asserts that β is the only factor affect expected retruns on stocks, Fama and Franche (1992) also discovered that there is a negative relationship between the average return on a security with both the market-to-book of the firm ratio (M/B) and the price-earnings of the firm ratio (P/E). It can be seen that, β might not the only factor can affect the expected rate of
Hensel, C. R., Ezra, D., & Ilkiw, J. H. (1991). The Importance of the Asset Allocation Decision.
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.