The Impact of Short-Selling Constraints on Financial Market Stability
|
|
- Sharon James
- 8 years ago
- Views:
Transcription
1 The Impact of Short-Selling Constraints on Financial Market Stability Mikhail Anufriev Jan Tuinstra 5th International Conference on Computing in Economics and Finance University of Technology, Sydney 6 July 29
2 Definition If a mean-variance investor, who demands A i,t (p) = E i,t[p t+ + y t+ ] ( + r f )p a i V i,t [p t+ + y t+ ], expects positive return then A i,t >, i.e. investor has long position expects negative return then A i,t <, i.e. investor has short position
3 Price Correction A i,t (p) = E i,t[p t+ + y t+ ] ( + r f )p a i V i,t [p t+ + y t+ ] If price change is not expected A i,t > iff ȳ > pr f, i.e., when asset is undervalued A i,t < iff ȳ < pr f, i.e., when asset is overvalued A i,t = iff ȳ = pr f, i.e., when price is on the fundamental value Notice that if price responds to the change in demand/supply, then strategy buy low, sell high is self-reinforcing and leads to price correction.,
4 Mechanism. investor s broker locates stocks stock is borrowed stock is actually not borrowed 2. security is sold and delivered to the buyer 3. investor closes ( covers ) his position, buying shares back 4. investor return the shares
5 Costs and risks of the short-selling strategy profit is limited, but loss are unlimited borrowing a stock might be difficult in an absence of a market for it a borrowed stock can be recalled at any moment by the lender legal restrictions hostility from society
6 Short Selling increases liquidity and informational efficiency, and eliminates mis-pricing Theory: Miller (JF, 977), Harrison and Kreps (QJE, 978), Diamond and Verrecchia (JFE, 987), Gallmeyer and Hollifield (JF, 28) Empirics: Jones and Lamont (JFE, 22), Lamont and Thaler (JPE, 23), Diether, Lee and Werner (RFS, 28) increases volatility and may lead to market crashes Lecce, Lepone and Segara (WP, 26), Setzu and Marchesi (WP, 28)
7 This Paper Take a model with heterogeneous agents (Brock and Hommes, JEDC, 998) Introduce the short-selling constraints Ā > : ( A i,t (p) = max Ā, E ) i,t[p t+ ] + ȳ ( + r f )p aσ 2 Analyse stability of the fundamental steady-state and amplitude of oscillations
8 Dynamical model of financial market. two assets riskless: risk-free interest rate r f risky: price p t and i.i.d. dividend y t with mean ȳ supply per investor S fundamental price p f = (ȳ aσ 2 S)/r f 2. mean-variance demand for the risky asset z h,t = E h,t [ pt+ + y t+ ( + r f ) p t ] / a σ 2 3. heterogeneous expectations of agents fundamentalists: Ef,t [p t+ ] = p f trend-followers: E c,t [p t+ ] = p f + g (p t p f ), g
9 Dynamical model of financial market 4. market clears, price p t is determined p t p f = + r f H n h,t E h,t [p t+ p f ] = h= g + r f n 2,t (p t p f ) 5. performances are computed ( Eh,t [x t ] ( + r f )x t A h,t r t = a σ 2 ) ( + S 2 S) x t (+r f )x t +aσ
10 Evolutionary updating of types 6. agents choose a new type for the next period past profits of two types U f,t = π f,t C U c,t = π c,t fraction of type h is computed as / n h,t+ = exp[β U h,t ] Z t, with Z t = exp[β U h,t] h β is the intensity of choice β = : equal distribution n f,t+ = n c,t+ =.5 β = + : all traders use the optimal strategy
11 Two regimes: stable and volatile Zero Supply Positive Supply
12 Two regimes: stable and volatile β < β : all agents have assets β < β < β : optimistic type is long, pessimistic is short β > β : fluctuations
13 Two attractors: overvaluation and undervaluation 2 2 Price Price 98 Return Return.5.5 Fractions.5 Fractions.5 2 fundamentalists chartists 2 fundamentalists chartists Positions Positions
14 Short-Sell Constraints Assume Ā > and impose a restriction: { A i,t (p t ) = max Ā, E i,t[p t+ ] + ȳ ( + r f )p } t a σ 2.
15 Short-selling constraints: Ā = primary bifurcation is not affected asymmetry between upper and lower attractors emerges the mispricing (amplitude of oscillations) increases
16 Adjusted demand and supply 4 3 Fundamentalists Chartists Aggregate 4 3 Price Deviation x c 2 E U Price Deviation x c 2 E C E U Fundamentalists Chartists Aggregate Adjusted Quantity -2 A+S Adjusted Quantity
17 Effect of short-selling constraints on upper trend 2 2 Price Price Return -.5 Return Fractions.5 Fractions.5 2 fundamentalists chartists 2 fundamentalists chartists Positions Positions
18 Short-selling constraints vs. No constraints When the short sell constraints are binding: level of price becomes higher smaller liquidity level of return is higher (smaller in absolute value) capital gain fundamentalists performance worsens w.r. to chartists (A f,t A c,t )r t fraction of fundamentalists is lower
19 Effect of short-selling constraints on crash 2 6 Price Price Return Return -3-5 Fractions.5 Fractions.5 2 fundamentalists chartists 6 fundamentalists chartists Positions Positions
20 Short-selling constraints vs. No constraints When the crash takes place under short-sell constraints: level of price is higher return is extremely low fractions of fundamentalists is much higher
21 Recall Lower Attractor vs. Upper Attractor 2 2 Price Price 98 Return.5.5 Return Fractions.5 Fractions.5 2 fundamentalists chartists 2 fundamentalists chartists Positions Positions
22 Lower Attractor without and with Crash 2 2 Price Price Return.5 Return.5 Fractions.5 Fractions.5 2 fundamentalists chartists 2 fundamentalists chartists Positions Positions
23 Summary Under short-sell constraints primary bifurcation (of the fundamental steady-state) is not affected (local stability is a local property, and the restrictions at the fundamental steady-state are not binding) there is an asymmetry between upper and lower attractors (constrained investors are present there in different proportions) amplitude of oscillations on the upper attractor increases (investors who try to eliminate mis-pricing are short)
24 Dependence on Ā for zero and positive supply
25 Fundamentalists vs. Contrarians
26 Fundamentalists vs. Sophisticated Trend Followers
27 Fundamentalists vs. Sophisticated Trend Followers 3 25 contsrained at t = 4, A = 7 no constraints
28 Fundamentalists vs. Sophisticated Trend Followers 3 contsrained at t = 4, A = 7 no constraints 3 contsrained at t = 4, A = 7 constrained at t = 5, A = no constraints
29 Conclusion Short-sell constraints affect the amplitude of cycle and drive price up liquidity effect composition of the ecology effect Short-sell constraints do not affect the local stability properties of the fundamental steady-state
30 Fundamentalists vs. Sophisticated Trend Followers Price Price Return Return Fractions.5 Fractions.5 6 fundamentalists chartists 6 fundamentalists chartists Positions 3-3 Positions
31 Fundamentalists vs. Contrarians Price Price Return -.5 Return Fractions.5 Fractions.5 fundamentalists chartists fundamentalists chartists.5.5 Positions Positions
The Impact of Short-Selling Constraints on Financial Market Stability in a Model with Heterogeneous Agents
The Impact of Short-Selling Constraints on Financial Market Stability in a Model with Heterogeneous Agents Mikhail Anufriev a Jan Tuinstra a a CeNDEF, Department of Economics, University of Amsterdam,
More informationEND OF CHAPTER EXERCISES - ANSWERS. Chapter 14 : Stock Valuation and the EMH
1 EN OF CHAPTER EXERCISES - ANSWERS Chapter 14 : Stock Valuation and the EMH Q1 oes the dividend discount model ignore the mass of investors who have bought their shares with the intention of selling them
More informationRegulating Short-Sales*
Regulating Short-Sales* by Ronel Elul S hort-selling, the practice of selling a security the seller does not own, is done in an attempt to profit from an expected decline in the price of the security.
More informationShort sales constraints and stock price behavior: evidence from the Taiwan Stock Exchange
Feng-Yu Lin (Taiwan), Cheng-Yi Chien (Taiwan), Day-Yang Liu (Taiwan), Yen-Sheng Huang (Taiwan) Short sales constraints and stock price behavior: evidence from the Taiwan Stock Exchange Abstract This paper
More informationFinancial Market Microstructure Theory
The Microstructure of Financial Markets, de Jong and Rindi (2009) Financial Market Microstructure Theory Based on de Jong and Rindi, Chapters 2 5 Frank de Jong Tilburg University 1 Determinants of the
More informationTHE EFFECTS OF STOCK LENDING ON SECURITY PRICES: AN EXPERIMENT
THE EFFECTS OF STOCK LENDING ON SECURITY PRICES: AN EXPERIMENT Steve Kaplan Toby Moskowitz Berk Sensoy November, 2011 MOTIVATION: WHAT IS THE IMPACT OF SHORT SELLING ON SECURITY PRICES? Does shorting make
More informationBehavior of Interest Rates
Behavior of Interest Rates Notes on Mishkin Chapter 5 (pages 91-108) Prof. Leigh Tesfatsion (Iowa State U) Last Revised: 21 February 2011 Mishkin Chapter 5: Selected Key In-Class Discussion Questions and
More informationLecture 5: Put - Call Parity
Lecture 5: Put - Call Parity Reading: J.C.Hull, Chapter 9 Reminder: basic assumptions 1. There are no arbitrage opportunities, i.e. no party can get a riskless profit. 2. Borrowing and lending are possible
More informationWhy asset management arms of banks should continue to lend bank shares
Why asset management arms of banks should continue to lend bank shares Robert Peston of the BBA and Jeremy Warner of the Independent have recently asked why the asset management arms of banks continue
More informationBehavioral Heterogeneity in Stock Prices
Behavioral Heterogeneity in Stock Prices H. Peter Boswijk Cars H. Hommes Sebastiano Manzan CeNDEF, University of Amsterdam, the Netherlands Abstract We estimate a dynamic asset pricing model characterized
More informationThe price dynamics of common trading strategies
The price dynamics of common trading strategies J. Doyne Farmer 1 and Shareen Joshi 2 A deterministic trading strategy can be regarded as a signal processing element that uses external information and
More informationTrading Costs and Taxes!
Trading Costs and Taxes! Aswath Damodaran Aswath Damodaran! 1! The Components of Trading Costs! Brokerage Cost: This is the most explicit of the costs that any investor pays but it is usually the smallest
More informationThe Effects of Short-Selling and Margin Trading: a Simulation Analysis
The Effects of Short-Selling and Margin Trading: a Simulation Analysis Alessio Setzu and Michele Marchesi DIEE, University of Cagliari {alessio.setzu, michele}@diee.unica.it Abstract This paper examines
More informationFutures Price d,f $ 0.65 = (1.05) (1.04)
24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding
More informationHow To Invest In Stocks And Bonds
Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation
More informationShort-sale Constraints, Bid-Ask Spreads, and Information Acquisition
Short-sale Constraints, Bid-Ask Spreads, and Information Acquisition Hong Liu Yajun Wang November 15, 2013 Olin Business School, Washington University in St. Louis and CAFR, liuh@wustl.edu. Robert H. Smith
More informationAFM 472. Midterm Examination. Monday Oct. 24, 2011. A. Huang
AFM 472 Midterm Examination Monday Oct. 24, 2011 A. Huang Name: Answer Key Student Number: Section (circle one): 10:00am 1:00pm 2:30pm Instructions: 1. Answer all questions in the space provided. If space
More informationInternational Stock Market Integration: A Dynamic General Equilibrium Approach
International Stock Market Integration: A Dynamic General Equilibrium Approach Harjoat S. Bhamra London Business School 2003 Outline of talk 1 Introduction......................... 1 2 Economy...........................
More informationA simple financial market model with chartists and fundamentalists: market entry levels and discontinuities
A simple financial market model with chartists and fundamentalists: market entry levels and discontinuities Fabio Tramontana *, Frank Westerhoff ** and Laura Gardini *** * University of Pavia, Department
More informationCapital Allocation Between The Risky And The Risk- Free Asset. Chapter 7
Capital Allocation Between The Risky And The Risk- Free Asset Chapter 7 Investment Decisions capital allocation decision = choice of proportion to be invested in risk-free versus risky assets asset allocation
More informationCHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM)
CHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concepts Review and Critical Thinking Questions 1. Some of the risk in holding any asset is unique to the asset in question.
More information2. How is a fund manager motivated to behave with this type of renumeration package?
MØA 155 PROBLEM SET: Options Exercise 1. Arbitrage [2] In the discussions of some of the models in this course, we relied on the following type of argument: If two investment strategies have the same payoff
More informationWhat is Equity Linked Note
What is Equity Linked Note Equity Linked Note (ELN) is a yield enhancement instrument which relates to equities & provides investors with the opportunity to attain superior yield over money market instruments.
More informationShort Sale. Dr. Patrick Toche
Short Sale Dr. Patrick Toche References : Zvi Bodie, Alex Kane, Alan J. Marcus. Essentials of Investment. McGraw- Hill Irwin. Chapter 3 of the Bodie-Kane-Marcus textbook will be followed closely. Other
More informationAnalysis of Factors Influencing the ETFs Short Sale Level in the US Market
Analysis of Factors Influencing the ETFs Short Sale Level in the US Market Dagmar Linnertová Masaryk University Faculty of Economics and Administration, Department of Finance Lipova 41a Brno, 602 00 Czech
More informationMargin Regulation and Volatility
Margin Regulation and Volatility Johannes Brumm 1 Michael Grill 2 Felix Kubler 3 Karl Schmedders 3 1 University of Zurich 2 Deutsche Bundesbank 3 University of Zurich and Swiss Finance Institute Workshop:
More informationSignaling Pessimism: Short Sales, Information, and Unusual Trade Sizes
Signaling Pessimism: Short Sales, Information, and Unusual Trade Sizes Benjamin M. Blau Department of Economics and Finance Huntsman School of Business Utah State University ben.blau@usu.edu Comments Welcome
More informationOption Value of Cash. Jialin Yu Columbia Business School. April 20, 2010
Option Value of Cash Jialin Yu Columbia Business School April 20, 2010 Motivation Positive price-volume correlation Low market is illiquid market (Shleifer & Vishny (92)) e.g., US S&P/Case-Shiller home
More informationFinance 400 A. Penati - G. Pennacchi. Option Pricing
Finance 400 A. Penati - G. Pennacchi Option Pricing Earlier we derived general pricing relationships for contingent claims in terms of an equilibrium stochastic discount factor or in terms of elementary
More informationOptions (1) Class 19 Financial Management, 15.414
Options (1) Class 19 Financial Management, 15.414 Today Options Risk management: Why, how, and what? Option payoffs Reading Brealey and Myers, Chapter 2, 21 Sally Jameson 2 Types of questions Your company,
More informationPayoff (Riskless bond) Payoff(Call) Combined
Short-Answer 1. Is the payoff to stockholders most similar to the payoff on a long put, a long call, a short put, a short call or some combination of these options? Long call 2. ebay s current stock price
More informationCHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS
1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries
More informationNotes for Lecture 2 (February 7)
CONTINUOUS COMPOUNDING Invest $1 for one year at interest rate r. Annual compounding: you get $(1+r). Semi-annual compounding: you get $(1 + (r/2)) 2. Continuous compounding: you get $e r. Invest $1 for
More informationChapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.)
Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.) The primary focus of the next two chapters will be to examine the debt/equity choice by firms. In particular,
More informationFOREX Trading Strategies and the Efficiency Of Sterilized Intervention
FOREX Trading Strategies and the Efficiency Of Sterilized Intervention Christopher Kubelec September 2004 Abstract This paper examines the role of sterilized intervention in correcting exchange rate misalignments.
More informationShort-Sales Constraints and Price Discovery: Evidence from the. Hong Kong Market
Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market Eric C. Chang * Faculty of Business and Economics The University of Hong Kong Pokfulam Road, Hong Kong ecchang@business.hku.hk
More informationSession IX: Lecturer: Dr. Jose Olmo. Module: Economics of Financial Markets. MSc. Financial Economics
Session IX: Stock Options: Properties, Mechanics and Valuation Lecturer: Dr. Jose Olmo Module: Economics of Financial Markets MSc. Financial Economics Department of Economics, City University, London Stock
More informationAsymmetric Information (2)
Asymmetric nformation (2) John Y. Campbell Ec2723 November 2013 John Y. Campbell (Ec2723) Asymmetric nformation (2) November 2013 1 / 24 Outline Market microstructure The study of trading costs Bid-ask
More informationIntroduction to Options. Derivatives
Introduction to Options Econ 422: Investment, Capital & Finance University of Washington Summer 2010 August 18, 2010 Derivatives A derivative is a security whose payoff or value depends on (is derived
More informationOption Values. Option Valuation. Call Option Value before Expiration. Determinants of Call Option Values
Option Values Option Valuation Intrinsic value profit that could be made if the option was immediately exercised Call: stock price exercise price : S T X i i k i X S Put: exercise price stock price : X
More informationThe impact of short-selling constraints on the B-share discount in Chinese market
The impact of short-selling constraints on the B-share discount in Chinese market Presented by Mo Zhang Department of Finance and Statistics Svenska handelshögskolan / Hanken School of Economics, www.hanken.fi
More informationThe Binomial Option Pricing Model André Farber
1 Solvay Business School Université Libre de Bruxelles The Binomial Option Pricing Model André Farber January 2002 Consider a non-dividend paying stock whose price is initially S 0. Divide time into small
More informationGoal Market Maker Pricing and Information about Prospective Order Flow
Goal Market Maker Pricing and Information about Prospective Order Flow EIEF October 9 202 Use a risk averse market making model to investigate. [Microstructural determinants of volatility, liquidity and
More informationCHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS
CHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS PROBLEM SETS 1. (e). (b) A higher borrowing is a consequence of the risk of the borrowers default. In perfect markets with no additional
More informationFinancial Markets and Institutions Abridged 10 th Edition
Financial Markets and Institutions Abridged 10 th Edition by Jeff Madura 1 12 Market Microstructure and Strategies Chapter Objectives describe the common types of stock transactions explain how stock transactions
More informationChapter 1: Financial Markets and Financial Derivatives
Chapter 1: Financial Markets and Financial Derivatives 1.1 Financial Markets Financial markets are markets for financial instruments, in which buyers and sellers find each other and create or exchange
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus $250 1329.78 = $332,445. The closing futures price for the March contract was 1364.00,
More informationPortfolio Performance Measures
Portfolio Performance Measures Objective: Evaluation of active portfolio management. A performance measure is useful, for example, in ranking the performance of mutual funds. Active portfolio managers
More informationManual for SOA Exam FM/CAS Exam 2.
Manual for SOA Exam FM/CAS Exam 2. Chapter 7. Derivatives markets. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall
More informationAdditional Practice Questions for Midterm I
1 Finance 333 Investments Additional Practice Questions for Midterm I Winter 2004 Professor Yan 1. Financial assets. A) directly contribute to the country's productive capacity *B) indirectly contribute
More informationEfficient Market Management - naked Credit Default swaps (CDS), and investor Risk
Noname manuscript No. (will be inserted by the editor) Will banning naked CDS impact bond prices? Agostino Capponi Martin Larsson Received: date / Accepted: date Abstract We develop a tractable partial
More informationunderstanding options
Investment Planning understanding options Get acquainted with this versatile investment tool. Understanding Options This brochure discusses the basic concepts of options: what they are, common investment
More informationInvesting in Stocks 14-1. Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Investing in Stocks McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 14-1 Invest in stocks Learning Objectives Identify the most important features of common and
More informationOption Premium = Intrinsic. Speculative Value. Value
Chapters 4/ Part Options: Basic Concepts Options Call Options Put Options Selling Options Reading The Wall Street Journal Combinations of Options Valuing Options An Option-Pricing Formula Investment in
More informationThe Cost of Financial Frictions for Life Insurers
The Cost of Financial Frictions for Life Insurers Ralph S. J. Koijen Motohiro Yogo University of Chicago and NBER Federal Reserve Bank of Minneapolis 1 1 The views expressed herein are not necessarily
More informationKey Concepts and Skills
Chapter 10 Some Lessons from Capital Market History Key Concepts and Skills Know how to calculate the return on an investment Understand the historical returns on various types of investments Understand
More informationAssumptions: No transaction cost, same rate for borrowing/lending, no default/counterparty risk
Derivatives Why? Allow easier methods to short sell a stock without a broker lending it. Facilitates hedging easily Allows the ability to take long/short position on less available commodities (Rice, Cotton,
More informationChapter 20 Understanding Options
Chapter 20 Understanding Options Multiple Choice Questions 1. Firms regularly use the following to reduce risk: (I) Currency options (II) Interest-rate options (III) Commodity options D) I, II, and III
More informationCorporate Taxes and Securitization
Corporate Taxes and Securitization The Journal of Finance by JoongHo Han KDI School of Public Policy and Management Kwangwoo Park Korea Advanced Institute of Science and Technology (KAIST) George Pennacchi
More informationCHAPTER 6. Topics in Chapter. What are investment returns? Risk, Return, and the Capital Asset Pricing Model
CHAPTER 6 Risk, Return, and the Capital Asset Pricing Model 1 Topics in Chapter Basic return concepts Basic risk concepts Stand-alone risk Portfolio (market) risk Risk and return: CAPM/SML 2 What are investment
More informationINTRODUCTION TO OPTIONS MARKETS QUESTIONS
INTRODUCTION TO OPTIONS MARKETS QUESTIONS 1. What is the difference between a put option and a call option? 2. What is the difference between an American option and a European option? 3. Why does an option
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
ECON 4110: Sample Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define risk as A) the difference between the return on common
More informationRetail Short Selling and Stock Prices
Retail Short Selling and Stock Prices ERIC K. KELLEY and PAUL C. TETLOCK * September 6, 013 ASTRACT This study tests asset pricing theories that feature short selling using a large database of retail trading.
More informationFinancial Development and Macroeconomic Stability
Financial Development and Macroeconomic Stability Vincenzo Quadrini University of Southern California Urban Jermann Wharton School of the University of Pennsylvania January 31, 2005 VERY PRELIMINARY AND
More informationPairs Trading STRATEGIES
Pairs Trading Pairs trading refers to opposite positions in two different stocks or indices, that is, a long (bullish) position in one stock and another short (bearish) position in another stock. The objective
More informationLecture 5: Forwards, Futures, and Futures Options
OPTIONS and FUTURES Lecture 5: Forwards, Futures, and Futures Options Philip H. Dybvig Washington University in Saint Louis Spot (cash) market Forward contract Futures contract Options on futures Copyright
More informationThe price dynamics of common trading strategies
Journal of Economic Behavior & Organization Vol. 49 (2002) 149 171 The price dynamics of common trading strategies J. Doyne Farmer a,, Shareen Joshi b a Santa Fe Institute, 1399 Hyde Park Road, Santa Fe
More informationChapter 11: Financial Markets Section 3
Chapter 11: Financial Markets Section 3 Objectives 1. Identify the benefits and risks of buying stocks. 2. Describe how stocks are traded. 3. Explain how stock performance is measured. 4. Describe the
More informationTHE STOCK EXCHANGE. Agócs Adrienne
THE STOCK EXCHANGE Agócs Adrienne OUTLINE The stock exchange shares, bonds and securities The main roles of the stock exchange Bulls and bears Types of securities Different information about the performance
More informationChapter 5 Risk and Return ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS
Chapter 5 Risk and Return ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 5-1 a. Stand-alone risk is only a part of total risk and pertains to the risk an investor takes by holding only one asset. Risk is
More information2. Exercising the option - buying or selling asset by using option. 3. Strike (or exercise) price - price at which asset may be bought or sold
Chapter 21 : Options-1 CHAPTER 21. OPTIONS Contents I. INTRODUCTION BASIC TERMS II. VALUATION OF OPTIONS A. Minimum Values of Options B. Maximum Values of Options C. Determinants of Call Value D. Black-Scholes
More informationWhy Do Firms Announce Open-Market Repurchase Programs?
Why Do Firms Announce Open-Market Repurchase Programs? Jacob Oded, (2005) Boston College PhD Seminar in Corporate Finance, Spring 2006 Outline 1 The Problem Previous Work 2 3 Outline The Problem Previous
More informationFigure S9.1 Profit from long position in Problem 9.9
Problem 9.9 Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances
More information9 Questions Every Australian Investor Should Ask Before Investing in an Exchange Traded Fund (ETF)
SPDR ETFs 9 Questions Every Australian Investor Should Ask Before Investing in an Exchange Traded Fund (ETF) 1. What is an ETF? 2. What kinds of ETFs are available? 3. How do ETFs differ from other investment
More informationThe good news in short interest
The good news in short interest Ekkehart Boehmer Mays Business School Texas A&M University & University of Oregon Zsuzsa R. Huszár College of Business Administration California State Polytechnic University
More informationRisk and return (1) Class 9 Financial Management, 15.414
Risk and return (1) Class 9 Financial Management, 15.414 Today Risk and return Statistics review Introduction to stock price behavior Reading Brealey and Myers, Chapter 7, p. 153 165 Road map Part 1. Valuation
More informationFINANCIAL ECONOMICS OPTION PRICING
OPTION PRICING Options are contingency contracts that specify payoffs if stock prices reach specified levels. A call option is the right to buy a stock at a specified price, X, called the strike price.
More informationTMX TRADING SIMULATOR QUICK GUIDE. Reshaping Canada s Equities Trading Landscape
TMX TRADING SIMULATOR QUICK GUIDE Reshaping Canada s Equities Trading Landscape OCTOBER 2014 Markets Hours All market data in the simulator is delayed by 15 minutes (except in special situations as the
More informationEquity Valuation. Lecture Notes # 8. 3 Choice of the Appropriate Discount Rate 2. 4 Future Cash Flows: the Dividend Discount Model (DDM) 3
Equity Valuation Lecture Notes # 8 Contents About Valuation 2 2 Present-Values 2 3 Choice of the Appropriate Discount Rate 2 4 Future Cash Flows: the Dividend Discount Model (DDM) 3 5 The Two-Stage Dividend-Growth
More information15.433 Investments. Assignment 1: Securities, Markets & Capital Market Theory. Each question is worth 0.2 points, the max points is 3 points
Assignment 1: Securities, Markets & Capital Market Theory Each question is worth 0.2 points, the max points is 3 points 1. The interest rate charged by banks with excess reserves at a Federal Reserve Bank
More informationStock Market -Trading and market participants
Stock Market -Trading and market participants Ruichang LU ( 卢 瑞 昌 ) Department of Finance Guanghua School of Management Peking University Overview Trading Stock Understand trading order Trading cost Margin
More informationShort Selling, Timing, and Profitability
Short Selling, Timing, and Profitability Karl B. Diether Abstract I test whether short-sellers are profitable using proprietary short-selling contract data from 1999 to 2005. I find that short-sellers
More informationChapter 3: Commodity Forwards and Futures
Chapter 3: Commodity Forwards and Futures In the previous chapter we study financial forward and futures contracts and we concluded that are all alike. Each commodity forward, however, has some unique
More informationMid-Term Spring 2003
Mid-Term Spring 2003 1. (1 point) You want to purchase XYZ stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3000 to invest, how many shares
More informationThe CAPM (Capital Asset Pricing Model) NPV Dependent on Discount Rate Schedule
The CAPM (Capital Asset Pricing Model) Massachusetts Institute of Technology CAPM Slide 1 of NPV Dependent on Discount Rate Schedule Discussed NPV and time value of money Choice of discount rate influences
More informationAuction Market System in Electronic Security Trading Platform
Auction Market System in Electronic Security Trading Platform Li ihao Bielefeld Graduate School of Economics and Management Discussion Paper: May 11, 2010 Abstract Under the background of the electronic
More informationMarket-maker, inventory control and foreign exchange dynamics
Q UANTITATIVE F INANCE V OLUME 3 (2003) 363 369 RESEARCH PAPER I NSTITUTE OF P HYSICS P UBLISHING quant.iop.org Market-maker, inventory control and foreign exchange dynamics Frank H Westerhoff Department
More informationSAMPLE MID-TERM QUESTIONS
SAMPLE MID-TERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID- TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,
More informationLecture 4: Properties of stock options
Lecture 4: Properties of stock options Reading: J.C.Hull, Chapter 9 An European call option is an agreement between two parties giving the holder the right to buy a certain asset (e.g. one stock unit)
More informationAsset Management Contracts and Equilibrium Prices
Asset Management Contracts and Equilibrium Prices ANDREA M. BUFFA DIMITRI VAYANOS PAUL WOOLLEY Boston University London School of Economics London School of Economics September, 2013 Abstract We study
More informationMutual Funds. What s a mutual fund? Consider investing in mutual funds. Diversification Professional management More free time
Mutual Funds Diversification Professional management More free time Consider investing in mutual funds Easy way to get started investing Only takes a small initial amount You get professional management
More informationUnderstanding the Impact of Weights Constraints in Portfolio Theory
Understanding the Impact of Weights Constraints in Portfolio Theory Thierry Roncalli Research & Development Lyxor Asset Management, Paris thierry.roncalli@lyxor.com January 2010 Abstract In this article,
More informationHow To Understand The Risks Of Financial Instruments
NATURE AND SPECIFIC RISKS OF THE MAIN FINANCIAL INSTRUMENTS The present section is intended to communicate to you, in accordance with the Directive, general information on the characteristics of the main
More informationRetail Short Selling and Stock Prices
Retail Short Selling and Stock Prices ERIC K. KELLEY and PAUL C. TETLOCK * January 2014 ABSTRACT This study tests asset pricing theories that feature short selling using a large database of retail trading.
More informationStapled Finance. Paul Povel and Raj Singh. Bauer College of Business, Univ. of Houston Carlson School of Management, Univ.
Paul Povel and Raj Singh Bauer College of Business, Univ. of Houston Carlson School of Management, Univ. of Minnesota What Is? What is? From the Business Press Explanations Acquisition financing, pre-arranged
More informationBuying Call or Long Call. Unlimited Profit Potential
Options Basis 1 An Investor can use options to achieve a number of different things depending on the strategy the investor employs. Novice option traders will be allowed to buy calls and puts, to anticipate
More informationInvestments, Chapter 4
Investments, Chapter 4 Answers to Selected Problems 2. An open-end fund has a net asset value of $10.70 per share. It is sold with a front-end load of 6 percent. What is the offering price? Answer: When
More informationThis paper is not to be removed from the Examination Halls
~~FN3023 ZB d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON FN3023 ZB BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences,
More informationAsset Prices Under Short-Sale Constraints
Asset Prices Under Short-Sale Constraints Yang Bai, Eric C. Chang and Jiang Wang First draft: October 5, 3. This draft: November, 6 Abstract In this paper, we study how short-sale constraints affect asset
More informationChapter 5 Financial Forwards and Futures
Chapter 5 Financial Forwards and Futures Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Question 5.2. Description Get Paid at Lose Ownership of Receive Payment
More information