Chapter 9 Behavioral and Technical Analysis I Behavioral Finance implications of psychological factors affecting investor behavior Focuses on that the people make the difference models of financial markets that emphasize potential a Informaitional Processing i Forecasting Errors when forecasting a firms future are high due to recent positive news this tends to over forecast and over compensate for this ii Overconfidence being confiedent in ones decisions People who iii Conservatisim Bias investors are too slow too conservative in trade a lot tend to underperform the market updating their beliefs in response to recent evidence people are too prone to believe that a small sample is representative of a broad population and infer patterns too quickly iv Represenative Bias i Framing b Behavioral Biases as gains relative to a low baseline level or losses relative to a higher baseline decisions affected by how choices are posed for example 1 how one words the deal can make it seem like an attractive or unattractive offer ii Mental Accounting segregate certain decisions a specific form of framing in which people 1 people are more likely to push up prices once there portfolio has capital gains versus new capital because it appears to them that they are trading free money 2 People are more likely to keep dividends versus sell stock 3 People are more likely to take on more risk once they are of non dividend stock ahead a Casinos iii Regret Avoidance unconventional choices that turn out badly so they acoid regret by making conventional picks people blame themselves more for 1 People will attribute a decline in a blue chip stock as a bad luck 2 People will attribute the same decline in a small cap stock as bad investing and bad research on their part iv Prospect Theory behavioral theory that investors utility depends on gains or losses from starting positions rather than on their levels of wealth 1 people increase gain in utility from a gain by less than a loss reduces it c Limits to Arbitrage i Fundamental Risk 1 markets can remain irrational longer than u remain solevant ii Implementation Costs iii Model Risk 1 costs to consider when trading may be not practical 1 using the wrong model can lead to wrong pricing d Limits to Arbitrage and the Law of One Price i Siamese Twin Companies 1 Royal Dutch Shell ii Close End Funds 1 funds would incure expenses in breaking up holdings e Bubbles and Behavioral Economies II Technical Analysis attempts to exploit recurring and predictable patterns a Trends and Corrections i Dow Theory term trends in stock market prices a technique that attempts to discern long and short 1 Primary Trend long term investment movement of price 2 Secondary Trend short term deviations of price from the underlying trend 3 Minor Trend are daily fluctuations of little importance ii Point and Figure Charts 1 no time dimension 2 X denote price increase 3 O denote Price Decrease iii Moving Averages average level over a period of time iv Breadth the extent to which movements in broad market indexes are reflected widely in movements of individual stock prices 1 the number of stocks that increased versus decreased a if the market rallyied and there are a lot of stocks that increased than it can assume the rally was widespread not specific to one stock that pulled averagfe up v Relative Strength compared to that of a broader market index Recent Performance of a given stock or industry 1 Rising ratio indicates stock has outperformed index b Sentiment Indicators i Trin statistic average volume in advancing issues the ratio of average volume in declining issues to 1 Trin VolumeDeclining NumberDeclining Volume ii Confidence Index Ratio of the yield of top rated corporate bonds to Advancing Number Advancing the yield on intermediate grade bonds market stock 1 increase is bearish sign iii Short Interest the total number of shares currently sold short in the iv Put Call Ratio Ratio of put options to call options outstanding on a a growing interest on puts as a hedge 2 Some see increase as bullish
View Full Document
Unlocking...