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Behavioral Finance

Behavioral Finance. Economics 437. March 26 Lecture. Totally Devoted to Cyprus Issue Why? Saliency Two things: Confiscating insured deposits Confiscating uninsured deposits Hangover effect Uncertainty as to policy What asset is risk free?. Bubbles. What is a bubble?

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Behavioral Finance

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  1. Behavioral Finance Economics 437

  2. March 26 Lecture • Totally Devoted to Cyprus Issue • Why? • Saliency • Two things: • Confiscating insured deposits • Confiscating uninsured deposits • Hangover effect • Uncertainty as to policy • What asset is risk free?

  3. Bubbles • What is a bubble? • When an asset trades above it’s true value and the process ‘accelerates’ • Eventually the bubble bursts with ‘disastrous’ results • Questions: • How do you know when you are in a bubble? • How do they start; how do they end • Should you ‘do something’ about them

  4. Prospect Theory Risk aversion Risk preferring Be careful: This interpretation assumes expected utility

  5. Now, On to Serial Correlation • Restate EMH • What is “predictability” • What is “serial correlation” • EMH (from Eugene Fama) • Strong form • Semi-strong • Weak • Also, “martingale” process (lack of predictability)

  6. Fama and French, 1992 • Aim is to test the Capital Asset Pricing Model • Does beta matter? • They found, as others had, that size of firm mattered: large firms “performed” worse than smaller firms • Big finding: Book/Market positively related to stock price performance

  7. The End

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