Behavioural financeexamines investor behaviour to understand how people make decisions, individually and collectively. Behavioural finance does not assume that people consider all available information in decision-making and act rationally by maximising utility within budget constraints and updating expectations consistent with Bayes’ formula. The resulting behaviours may affect what is observed in the financial markets. Loss…
A number of additional anomalies has been documented in the financial markets, including the existence of Closed-End Investment Fund Discounts A closed-end investment fund issues a fixed number of shares at inception and does not sell any additional shares after the initial offering. Therefore, the fund capitalisation is fixed unless a secondary public offering is…
Researchers conclude that a market anomaly may be present if a change in the price of an asset or security cannot directly be linked to current relevant information known in the market or to the release of new information into the market. In the widespread search for discovering profitable anomalies, many findings could simply be the…
The implications of efficient markets to investment managers and analysts are important because they affect the value of securities and how these securities are managed. Several implications can be drawn from the evidence on efficient markets for developed markets: Fundamental Analysis Fundamental analysis is the examiniation of publicly available information and the formulaiton of forecasts…
For markets to be efficient, prices should adjust quickly and rationally to the release of new information. In other words, prices of assets in an efficient market should “fully reflect” all information. Market Participants One of the most critical factors contributing to the degree of efficiency in a market is the number of market participants. …
An informationally efficient market (an efficient market) is a market in which asset prices reflect new information quickly and rationally. An efficient market is thus a market in which asset prices reflect all past and present information. Investment managers and analysts, as noted, are interested in market efficiency because the extent to which a market…
Three of the most widely followed alternative investment classes are commodities, real estate, and hedge funds. Commodity Indexes Commodity indexes consist of futures contracts on one or more commodities, such as agricultural products (rice, wheat, sugar), livestock (cattle, hogs), precious and common metals (gold, silver, copper), and energy commodities (crude oil, natural gas). Real Estate…
Construction The fixed-income universe includes securities issued by governments, government agencies, and corporations. Each of these entities may issue a variety of fixed-income securities with different characteristics. As a result, the number of fixed-income securities is many times larger than the number of equity securities. To represent a specific fixed-income market or segment, indexes may…
Broad Market Indexes A broad equity market index, as its name suggests, represents an entire given equity market and typically includes securities representing more than 90 percent of the selected market. Multi-Market Indexes Multi-market indexes usually comprise indexes from different countries and regions and are designed to represent multiple security markets. Multi-market indexes may represent…
Some of the major uses of indexes include: Gauges of Market Sentiment The original purpose of stock market indexes was to provide a gauge of investor confidence or market sentiment. As indicators of the collective opinion of market participants, indexes reflect investor attitudes and behaviour. Proxies for Measuring and Modelling Returns, Systematic Risk, and Risk-Adjusted…