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Behavioral Finance

Behavioral Finance. Economics 437. Haugen-Baker, 1996. Great summary of the literature A Grand Synthesis Use multi-factor model to create a “generalized” value portfolio Incorporate J-T effects 20 percent outperformance for H-B synthesis

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Behavioral Finance

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  1. Behavioral Finance Economics 437

  2. Haugen-Baker, 1996 • Great summary of the literature • A Grand Synthesis • Use multi-factor model to create a “generalized” value portfolio • Incorporate J-T effects • 20 percent outperformance for H-B synthesis • Data used from five countries: France, Germany, Japan, UK, US

  3. Hanna-Ready, 2005 • Dispute H-B results due to monthly turnover (40 percent) in HB rebalancing (causes high transaction costs) • Conclude that six month rebalancing of F-F portfolios is best • Most of H-B results come from J-T. J-T results fall if transaction costs considered • Cannot explain why F-F does so well

  4. Cooper, McConnell, Ovtchinnikov • “We find that January has predictive power for two of the three premiums in the Fama-French three-factor model of asset pricing.” • Data 1940-2003

  5. Lakonishok and Smidt 1988 • “Are Seasonal Anomalies Real? A Ninety Year Perspective? • Data from daily closes of DJ from 1897 to 1986 • Theory as protection agst data snooping…. • Interesting data facts • No stock market from Aug 1 to Dec 12 in 1914 • Saturday trading until June 1, 1952 • Results • No January effect for large stocks (high market cap stocks) • First half of the month not significantly “better” than 2nd half of the month • Blue Monday; Last trading date of the week positive • Positive “day before holiday” effect; holiday effect twide end of week effect; rates negative after holidays • Pre-Xmas negative; post-Xmas positive • Turn of the month effect

  6. The End

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