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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

Behavioral Finance

Economics 437

final exam friday 2pm may 3 rd in chem lecture hall
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)
what is emh
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
the efficient market hypothesis emh
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
definition of emh eugene fama s definition from shleifer s chapter one
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
modern finance assumes
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”
noise trader theory mainly shleifer etal
Noise Trader Theory (mainly Shleifer, etal)
  • Shleifer, Etal
  • Definition of “agents”
  • Definition of assets
  • Conclusions
anomalies
Anomalies
  • Biases, Heuristics
    • Status Quo, Endowment, Saliency, Mental Accounting, Framing
    • Loss Aversion (prospect theory)
serial correlation
Serial Correlation
  • Fama-French and DeBondt-Thaler
  • Jegadeesh-Titman
  • Calendar Effects
other
Other
  • Corporate Governance
  • Equity Premium Puzzle