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The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
The Stock Market Facts and theories.
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The Stock Market Facts and theories.

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  • 1. The Stock Market Facts and theories.
  • 2. Shares and values : Introduction.
    • Shares :
      • Some words on history.
          • Risk Sharing.
          • Liquidity.
      • Ownership rights / firms.
          • Residual claimant, but limited liability.
          • Formal control outside bankruptcy.
          • Tradable.
    • The stock market and the firm.
      • Financing (Modigliani Miller)
      • Governance…
  • 3. Questions……
    • The curious outsider’s view : dynamics /stock prices
      • Random walk (Bachelier…) ?
      • « Fat tail » (Mandelbrot) ?
    • The investors’ eyes : how to make money ?
        • Can you predict future stock prices ?
        • Can you beat the market ?
          • Bachelier no.
          • Modern version : is the market efficient ?
    • The economist’s questions :
      • The same i.e
        • What determines prices and their dynamics..
      • Plus financing the firm and governance..
  • 4. Facts :aggregate evolution of stock prices A century’s evolution..
  • 5. Long period returns : US
  • 6. Long period returns…
  • 7. US : Volatility of returns.
  • 8. US : Volatility of returns, next..
  • 9. The predictability of returns…… ?
  • 10. Theoretical tools… Fundamental value, Riskiness, Market « efficiency ».
  • 11. Stock valuation : the standard theory…
    • Two polar models for valuation :
      • No dividend :
        • value = selling asset value.
        • Fixed or random selling date, liquidation ?
      • Standard theory :
        • Shares give rigth to get dividents.
        • A share identified to an infinite sequence of dividends. : d(t).
    • Intermediate theories.
        • Choice : self finance, distribute dividends.
        • Endogenous, logic of dividends, profitability of reinvested funds. .
    • Option :
      • Standard theory …
      • And elementary …..
  • 12. The fundamental value-1
    • Setting :
      • Certain dividend,
      • Common point expectations on next period price,
      • Safe interest rate r
    • The basic connection.
      • p(t) = {1/(1+r)}{p e (t+1/t) + d(t+1)}
      • The asset price depends on its price to-morrow, etc…
      • True with uncertainty :
      • p(t) = {1/(1+r)}{E (p e (t+1) + E( d(t+1 )}
    • The dynamics with common point expectations
      • p e (t+1/t) ) = {1/(1+r)}{p e (t+2/t+1) + d(t+2)} …
      • p(t) =  t+S t+1 {1/(1+r} T-t {d(T)} + {1/(1+r)} t+S p e (t+S/t+S+1)+d(t+S)}.
      • Si for S large, p e (t+S) grows more slowly than (1+r) S, the 2d term tends to zero
      • p(t) =  +∞ T=t+1 {1/(1+r} T-t {d(T)} , is the fundmental value.
    • Partial equilibrium, common expectations…
  • 13. Remark on the fundamental value :
    • It is the perfect foresight equilibrium.
      • Assume p(t+1)= p e (t+1 ),
      • Then, the above formula holds true.
      • Also the rational expectations equilibrium ..
    • But not the only one …
      • Bubble solution :
      • p(t)+ Δ , p(t+1)+(1+r) Δ , …p(t+t’)+(1+r) t’ Δ , is also a solution.
    • It is a locally SREE . (« eductively stable »)
      • It is CK that p (t+S) and d(t+S) grow less quickly than (1+r) S :
        • p(t+S)  I, I/ (1+r) S «small », for some S when
        • d (t+S)<D, D/(1+r) S
      • Argument
        • p(t+S-1)  I/(1+r) +d(t+S)/(1+r)…..
        • p(t+S-2)  I/(1+r) 2 +d(t+S-1)/(1+r) +d(t+S)/(1+r) 2
      • It is almost CK that p(t) =valeur fondamentale .
    • Stochastic version.
      • p (t+S) and d(t+S) grow < than (1+r) S , p(t+S)  I
  • 14. The fundamental value : other formulaS..
    • The kernel :
      • p(t) =  +∞ T=t+1 {1/(1+r} T-t {E( d(T ))}
      • Price equals the expectation of the fundamental value.
    • Illustrations. d eterministic case.
        • Dividends grow at the rate g
        • P(t) = d(0)(1+g) t /(r-g) =d(t)/(r-g).
        • g=0
    • Comments.
      • r increases, P decreases : intuition.
      • If r=0,05, g=0,02, p =33 times the dividend,
      • Si g=0,03, 50 fois, si g=0,04, 100, si 0,01, 25 times.
      • Sensitivity to forecasts .
    • Illustrations : stochastic dvidends iid
        • d(t) = d +  ;  zero mean, finite variance.
        • p(t) = d /r, price constant.
  • 15. The fundamental value : other formulaS..
    • The kernel :
      • p(t) =  +∞ T=t+1 {1/(1+r} T-t {E( d(T ))}
      • Price equals the expectation of the fundamental value.
    • Illustrations : stochastic case b :
      • d(t) = d +a ( d(t-1) - d ) + 
      • p(t) = d /r + a( d(t)- d )/(1+r- a), a =1, 0
    • Markov Chain :
      • d takes two values, h, b=0,
      • Markov transition, c probab. Change. « ergodic » prob. : P =(1/2, 1/2)
      • P(t) two values Markov chain Stationary.
      • support between 0 et (h/r), fluctuates like dividends.
  • 16. Complexification.
    • More complex processes.
      • ARMA, etc…
      • May depend on the past.
    • Asymetric information ?
      • « Smart et noisy traders », ..(Campbell, Shiller..)
      • Smart infinitely lived
      • Dividends sum of Brownian and AR1,
      • P(t) = VF(t) –h/(r-g) + y(t).
    • Common property :
      • Price fluctuate less than reconstituted fundamental value !!
      • v(t) =  T=t+1 {1/(1+r} T { d(T ))}
      • P(t) = E( v(t )), v(t)=p(t)+e(t), Var(p)<Var(v), ergodicity
  • 17. Illustrations.
    • Prices.-
    prix 4 cas1 t prix Cas 2 Cas 3 Cas 4
  • 18. Risky assets
    • Valuation of a risky asset.
      • q(j)/q(0) = [1/(1+r)][  s A(j,s) P(s)],
      • P(s) =  (s)/   (s)  is the «  risk-neutral probability  »..
      • Price = expectations of the discounted value of incomes
        • with corrected probabilities.
        • (probability marginal utility of income).
      • Hence take corrected probability of the fundamental value…
    • Relative valuation of assets : (CAPM)
      • [(ER(j) – (1+r)] = [E(R(  *)-(1+r)][Cov[(R(  *),R(j)]/[Var (R(  *)]
      • * is the market portfolio. …
    • A stock return.
      • q= E ( A )/(1+r) – [Cov( A,c(m )]/ [(1+r)T(.)].
    • Market efficiency and asymetric information.
  • 19. The theory of fundamental value and its predictions.
    • The evolution of prices Les prix et leur évolution:
      • 1-A: 2 firms with the same flow of dividends have equal value.
      • 1-C : The risk premium is reasonable…..
      • 1-D : Statistical evolution : prices vary less than the reconstitued fundamental value..
      • 1-E : No bubble.
    • Prix, information et stratégies des acteurs.
      • 2-A : No information in to-day prices ?
      • 2-B : You cannot beat the market (ovm)
      • 2-C : No (public) information to beat the market.
      • 2-E : Crash : a lot of information . .
    • The stock market and the firm.
      • 3-A : appropriate valuation.
      • 3-B : good Signal for investment.
      • 3-B « Discipline  »
  • 20. 1-A : Price Difference and equal fundamental value.
  • 21. 1C: Unreasonable risk premium ?
    • 1-C :The risk premium is reasonable
      • US (1889-1978)
      • 3 variables
      • Real return of stocks (SP 500) : 7% ( R s )
      • Real return of safe bonds : 1% ( R s )
      • Per capita consumption growth : 1,8% / an ( c t +1 / c t )
    • Cov( Rs , ct +1 / ct ) > 0
  • 22. 1-C : (Equity Premium Puzzle, EPP)
    • US 1889-1978)
    • 3 variables
      • Real return of stocks (SP 500) : 7% ( R s )
      • Real return of safe bonds : 1% ( R s )
      • Per capita consumption growth : 1,8% / year ( c t +1 / c t )
    • Puzzle (Mehra-Prescott 1985)
      • Incompatible with standard behaviour under risk.
      • Risk aversion and time preference.
      • Cov( R s , c t +1 / c t ) > 0, but small, justifies a small risk premium with iso-elastic utility and standard preferences.
  • 23. 1D, 2C – Other predictions
    • 1-D : Prices vary less than reconstitued fundamental values.
    • 2-B : You cannot beat the market (ovm)
    • 2-C : No public information to beat the market.
    • 1-C : No bubble.
      • Tulip mania
      • Internet bubble.
    • 2-E : Crash : a lot of information.
    • Doubts
      • Crisis , Law…
      • 1929, Crash 1987
      • Change Crises.
  • 24. 2-D : Objections to « efficiency ».
  • 25. Excess volatility puzzle.
    • The diagram
      • observed prices : 1860 to-day.
      • Fundamental values reconstituted.
        • With several assumptions on the discount rate…
        • Or on future dividends.
    • Prices vary more than reconstituted f undamental values.
  • 26. No bubble…
    • The tulip mania ;
      • Feb. 1637 :
        • Bulb = 20 times a yearly craftsman income.
        • 5 ha land.
      • Facts..
    • Explanations.
      • Law/ possibility of cancelllation of future contracts…
    200 12-11 03-02
  • 27. Others
    • Internet Bubble…
      • 2001
    • Crashes.
      • 1929.
      • 1987
      • 2008….
  • 28. Aller plus loin ou abandonner le paradigme …..
    • La première option
      • Garder l’hypothèse d’anticipations rationnelles
      • Tester encore version savante étendue: horizon court, multiplicité.
      • Introduire une dose limitée de « rationalité limitée ».
        • Rationalité non standard :neu
        • Myopie, …
    • La seconde option :
      • Rationalité limitée plus radicale au niveau individuel.
      • Ou au niveau collectif : test de la plausibilité de l’équilibre….
        • Divinatoire : conséquence de CK du modèle et de la rationalité), Mise en cause de la « rationnalisabilité » de l’équilibre.
        • Évolutive;
    • Première option : une galerie de phénomènes compatibles
      • Fluctuations « erratiques » des cours.
      • Comportement « moutonnier » d’imitation…
      • Krachs de « multiplicité ».
      • Bulles en information asymétrique.
      • Bulles avec agents « irrationnels ».

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