Behavioral Finance
Fall 2012
Taufique Samdani Iéseg School of Management t.samdani@ieseg.fr
Course Outline
• Part 1: Introduction
– Theory and evidence
• Anomalies in Financial Markets. • Efficient Market explanation to anomalies in Market (Fama & French).
– Behavioral Finance explanations to anomalies in Market.
• Limits to Arbitrage • Psychology (Beliefs & Preferences)
• Part 2:
Psychology
– Preferences
• Utility Theory. • Prospect Theory (Kahneman & Tversky)
Course Outline
• Part 3: IPO
– Underpricing
• Part 4:
M&A
– Synergies
• Part 5:
Capital Structure
– Dividends
• Part 6:
Asset Pricing
– Market Bubbles
Part 1 Theory and Evidence
Agenda
1.1 Capital Markets History 1.2 EMH (Efficient Market Hypothesis) 1.3 Behavioral Finance 1.3.1 Limits to Arbitrage 1.3.2 Evidence 1.3.2.1 Twin Shares 1.3.2.2 Index Inclusions 1.3.2.3 Internet Carve-outs 1.3.23 Psychology
1.1
Capital Markets History
< 1960s
• Fundemental Analysis
– Financial and economic data
• Technical Analysis
– Past price patterns
1960s
• Theory of competitive markets
– « no free lunch »
1970s
• Efficient Market Hypothesis (EMH)
« An efficient capital market is a market that is efficient in processing information. The prices of securities observed at any time are based on correct evaluations of all information available at that time. In an efficient market, prices fully reflect available information. Real Capital Markets are efficient» (Fama 1970)
1.2
Efficient Market Hypothesis (EMH)
EMH pricing
• Price (P) = fundamental value (E[P*])
where E[R] is the rational discount rate and E[CF] is the rational cash flows.
• How do you determine E[P*] ?
EMH forms
• Weak form:
– All past info efficiently included in the price.
• Semi-strong form:
– All past and new public info efficiently included.
• Strong form:
– All past and new public and private info...