The aim of this course is to cover a modern approach to financial markets with tools from psychology and human behaviour. This new approach to the behaviour of markets based on the human factor complements the existing theories to explain financial and capital markets.
On completing the course the participants will:
- Understand the basics of behavioural finance and the roles of securities prices in the economy.
- Comprehend the role of psychology on financial markets and investor behaviour.
- Understand the return predictability mechanism for various financial instruments.
- Understand the role of arbitrageurs in financial markets.
- Efficient markets hypothesis (EMH): Definitions; Theoretical arguments for flat aggregate demand curve; Equilibrium expected returns models; Key methodologies; Pro-EMH evidence.
- Return predictability in the stock market; Data mining; Joint hypothesis problem; Predictability in bonds, forex, futures, real estate, options, sports betting.
- Definition of arbitrageur; Long-short trades; Risk vs. Horizon; Transaction costs and short-selling costs; Fundamental risk; Noise-trader risk; Professional arbitrage; Destabilizing informed trading (positive feedback, predation); Case: Strategic Capital Management, LLC.
- Definition of average investor; Belief biases; Limited attention and categorization; Non-traditional preferences – prospect theory and loss aversion; Bubbles and systematic investor sentiment.
- Supply of securities and firm investment characteristics (market timing, catering) by rational firms; Associated institutions; Relative horizons and incentives; Biased managers.
- Equity premium puzzle; Volatility puzzle.
- Disposition Effect; Endowment Effect and the Availability; Heuristic Myopic Loss Aversion, and Mental Accounting’ Naïve Diversification: Popular Strategies; Overconfidence and Optimism.