Phd thesis on stock market volatility

Phd thesis on stock market volatility

The aim of the thesis is to investigate the economic impact of the coronavirus surrounding major events on financial market in the US. It investigates the speed of stock market response following WHO declaration of world pandemic. For the thesis research part, we This thesis investigates the prediction of stock returns of a focal firm based on the firm’s supply chain network. Nowadays, firms rarely operate in isolation exhibiting complex relationships among them, and supply chain networks capture one of the most important ones for business operations The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information

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The efficient-market hypothesis EMH is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information.

Because the EMH is formulated phd thesis on stock market volatility terms of risk adjustment, it only makes testable predictions when coupled with a particular model of risk. The idea that financial market returns are difficult to predict goes back to Bachelier[3] Mandelbrot[4] and Samuelson[5] but is closely associated with Eugene Famain part due to his influential review of the theoretical and empirical research Fama Many decades phd thesis on stock market volatility empirical research on return predictability has found mixed evidence.

Research in the s and s often found a lack of predictability e. Ball and Brown ; Fama, Fisher, Jensen, and Roll phd thesis on stock market volatility, yet the ss saw an explosion of discovered return predictors e.

Rosenberg, Reid, and Lanstein ; Campbell and Shiller ; Jegadeesh and Titman Since the s, studies have often found that return predictability is becoming more elusive, as predictability fails to work out-of-sample Goyal and Welchor has been weakened by advances in trading technology and investor learning Chordia, Phd thesis on stock market volatility, and Tong ; McLean and Pontiff ; Martineau Suppose that a piece of information about the value of a stock say, about a future merger is widely available to investors.

If the price of the stock does not already reflect that information, then investors can trade on it, thereby moving the price until the information is no longer useful for trading. Note that this thought experiment does not necessarily imply that stock prices are unpredictable. For example, suppose that the piece of information in question says that a financial crisis is likely to come soon. Investors typically do not like to hold stocks during a financial crisis, and thus investors may sell stocks until the price drops enough so that the expected return compensates for this risk.

How efficient markets are and are not linked to the random walk theory can be described through the fundamental theorem of asset pricing. This theorem provides mathematical predictions regarding the price of a stock, assuming that there is no arbitragethat is, assuming that there is no risk-free way to trade profitably.

Formally, if arbitrage is impossible, then the theorem predicts that the price of a stock is the discounted value of its future price and dividend:. Note that this equation does not generally imply a random walk. However, if we assume the stochastic discount factor is constant and the time interval is short enough so that no dividend is being paid, we have.

which implies that the log of stock prices follows a random walk with a drift. Although the concept of an efficient market is similar to the assumption that stock prices follow:.

which follows a martingalethe EMH does not always assume that stocks follow a martingale. Research by Alfred Cowles in the s and s suggested that professional investors were in general unable to outperform the market. During the ss empirical studies focused on time-series properties, and found that US stock prices and related financial series followed a random walk model in the short-term.

In their seminal paper, Fama, Fisher, Jensen, and Phd thesis on stock market volatility propose the event study methodology and show that stock prices on average react before a stock split, but have no movement afterwards. In Fama's influential review paper, he categorized empirical tests of efficiency into "weak-form", "semi-strong-form", and phd thesis on stock market volatility tests, phd thesis on stock market volatility.

These categories of tests refer to the information set used in the statement "prices reflect all available information. Semi-strong form tests study information beyond historical prices which is publicly available. Strong-form tests regard private information. Benoit Mandelbrot claimed the efficient markets theory was first proposed by the French mathematician Louis Bachelier in in his PhD thesis "The Theory of Speculation" describing how prices of commodities and stocks varied in markets.

But the work was never forgotten in the mathematical community, as Bachelier published a book in detailing his ideas, [9] which was cited by mathematicians including Joseph Phd thesis on stock market volatility. DoobWilliam Feller [9] and Andrey Kolmogorov. The concept of market efficiency had been anticipated at the beginning of the century in the dissertation submitted by Bachelier to the Sorbonne for his PhD in mathematics.

In his opening paragraph, Bachelier recognizes that "past, present and even discounted future events are reflected in market price, but often show no apparent relation to price changes", phd thesis on stock market volatility.

The efficient markets theory was not popular until the s when the advent of computers made it possible to compare calculations and prices of hundreds of stocks more quickly and effortlessly. InF. Hayek argued that markets were the most effective way of aggregating the pieces of information dispersed among individuals within a society.

Given the ability to profit from private information, self-interested traders are motivated to acquire and act on their private information. In doing so, traders contribute to more and more efficient market prices. In the competitive limit, market prices reflect all available information and prices can only move in response to news.

Thus there is a very close link between EMH and the random walk hypothesis. The efficient-market hypothesis emerged as a prominent theory in the mids. Paul Samuelson had begun to circulate Bachelier's work among economists.

In Bachelier's dissertation along with the empirical studies mentioned above were published in an anthology edited by Paul Cootner. The paper extended and refined the theory, included the definitions for three forms of financial market efficiency : weak, semi-strong and strong see above. Investors, including the likes of Warren Buffett[23] George Soros[24] [25] Jim Simons[26] [27] and researchers have disputed the efficient-market hypothesis both empirically and theoretically.

Behavioral economists attribute the imperfections in financial markets to a combination of cognitive biases such as overconfidenceoverreaction, representative bias, information biasphd thesis on stock market volatility, and various other predictable human errors in reasoning and information processing.

These have been researched by psychologists such as Daniel KahnemanAmos Tversky and Paul Slovic and economist Richard Thaler. Empirical evidence has been mixed, but has generally not supported strong forms of the efficient-market hypothesis. Behavioral psychology approaches to stock market trading are among some of the more promising [ citation needed ] alternatives to EMH investment strategies such as momentum trading seek to exploit exactly such inefficiencies. But Nobel Laureate co-founder of the programme Daniel Kahneman —announced his skepticism of investors beating the market: "They're just not going to do it.

It's just not going to happen. For example, one prominent finding in Behavioral Finance is that individuals employ hyperbolic discounting. It is demonstrably true that bondsmortgagesannuities and other similar obligations subject to competitive market forces do not. Any manifestation of hyperbolic discounting in the pricing of these obligations would invite arbitrage thereby quickly eliminating any vestige of individual biases.

Similarly, diversificationderivative securities and other hedging strategies assuage if not eliminate potential mispricings from the severe risk-intolerance loss aversion of individuals underscored by behavioral finance. On the phd thesis on stock market volatility hand, economists, behavioral psychologists and mutual fund managers are drawn from the human population and are therefore subject to the biases that behavioralists showcase.

By contrast, the price signals in markets are far less subject to individual biases highlighted by the Behavioral Finance programme. Richard Thaler has started a fund based on his research on cognitive biases.

In a report he identified complexity and herd behavior as central to the global financial crisis of Further empirical phd thesis on stock market volatility has highlighted the impact transaction costs have on the concept of market efficiency, with much evidence suggesting that any anomalies pertaining to market inefficiencies are the result of a cost benefit analysis made by those willing to incur the cost of acquiring the valuable information in order to trade on it, phd thesis on stock market volatility.

Additionally, the concept of liquidity is a critical component to capturing phd thesis on stock market volatility in tests for abnormal returns. Any test of this proposition faces the joint hypothesis problem, where it is impossible to ever test for market efficiency, since to do so requires the use of a measuring stick against which abnormal returns are compared —one cannot know if the market is efficient if one does not know if a model correctly stipulates the required rate of return.

Consequently, a situation arises where either the asset pricing model is incorrect phd thesis on stock market volatility the market is inefficient, but one has no way of knowing which is the case. The performance of stock markets is correlated with the amount of sunshine in the city where the main exchange is located.

While event studies of stock splits are consistent with the EMH Fama, Fisher, Jensen, and Roll,other empirical analyses have found problems with the efficient-market hypothesis. Early examples include the observation that small neglected stocks and stocks with high book-to-market low price-to-book ratios value stocks tended to achieve abnormally high returns relative to what could be explained by the CAPM.

Following GJR's results and mounting empirical evidence of EMH anomalies, phd thesis on stock market volatility, academics began to move away from the CAPM towards risk factor models such as the Fama-French 3 factor model. These risk factor models are not properly founded on economic theory whereas CAPM is founded on Modern Portfolio Theorybut rather, constructed with long-short portfolios in response to the observed empirical EMH anomalies.

For instance, the "small-minus-big" SMB factor in the FF3 factor model is simply a portfolio that holds long positions on small stocks and short positions on large stocks to mimic the risks small stocks face. These risk factors are said to represent some aspect or dimension of undiversifiable systematic risk which should be compensated with higher expected returns.

Additional popular risk factors include the "HML" value factor Fama and French, ; "MOM" momentum factor Carhart, ; "ILLIQ" liquidity factors Amihud et al. See also Robert Haugen. Economists Matthew Bishop and Michael Green claim that full acceptance of the hypothesis goes against the thinking of Adam Smith and John Maynard Keyneswho both believed irrational behavior had a real impact on the markets. Economist John Quiggin has claimed that " Bitcoin is perhaps the finest example of a pure bubble ", and that it provides a conclusive refutation of EMH.

Tshilidzi Marwala surmised that artificial intelligence AI influences the applicability of the efficient market hypothesis in that the greater amount of AI-based market participants, the more efficient the markets become.

Warren Buffett has also argued against EMH, most notably in his presentation " The Superinvestors of Graham-and-Doddsville ".

He says preponderance of value investors among the world's money managers with the highest rates of performance rebuts the claim of EMH proponents that luck is the reason some investors appear more successful than others. Burton Malkiel in his A Random Walk Down Wall Street [42] argues that "the preponderance of statistical evidence" supports EMH, but admits there are enough "gremlins lurking about" in the data to prevent EMH from being conclusively proved.

In his book The Reformation in Economicseconomist and financial phd thesis on stock market volatility Philip Pilkington has argued that the EMH is actually a tautology masquerading as a theory.

When pressed on this point, Pinkington argues that EMH proponents will usually say that any actual investor will converge with the average investor given enough time and so no investor will beat the market average. But Pilkington points out that when proponents of the theory are presented with evidence that a small minority of investors do, in fact, phd thesis on stock market volatility, beat the market over the long-run, these proponents then say that these investors were simply 'lucky'.

Pilkington argues that introducing the idea that anyone who diverges from the theory is simply 'lucky' insulates the theory from falsification and so, drawing on the philosopher of science and critic of neoclassical economics Hans AlbertPilkington argues that the theory falls back into being a tautology or a pseudoscientific construct. Nobel Prize-winning economist Paul Samuelson argued that the stock market is "micro efficient" but not "macro efficient": the EMH is much better suited for individual stocks than it is for the aggregate stock market.

Research based on regression and scatter diagrams, published inphd thesis on stock market volatility, has strongly supported Samuelson's dictum. Peter Lyncha mutual fund manager at Fidelity Investments who phd thesis on stock market volatility more than doubled market averages while managing the Magellan Fundhas argued that the EMH is contradictory to the random walk hypothesis —though both concepts are widely taught in business schools without seeming awareness of a contradiction.

If asset prices are rational and based on all available data as the efficient market hypothesis proposes, then fluctuations in asset price are not random. But if the random walk hypothesis is valid, then asset prices are not rational. Joel Tillinghast, also a fund manager at Fidelity with a long history of outperforming a benchmark, has written that the core arguments of the EMH are "more true than not" and he accepts a "sloppy" version of the theory allowing for a margin of error.

Tillinghast also asserts that even staunch EMH proponents will admit weaknesses to the theory when assets are significantly over- or under-priced, such as double or half their value according to fundamental analysis. The financial crisis of —08 led to renewed scrutiny and criticism of the hypothesis.

At the International Organization of Securities Commissions annual conference, held in Junethe hypothesis took center stage. Martin Wolfthe chief economics commentator for the Financial Timesdismissed the hypothesis as being a useless way to examine how markets function in reality. Paul McCulleymanaging director of PIMCOwas less extreme in his criticism, saying that the hypothesis had not failed, but was "seriously flawed" in its neglect of human nature. The financial crisis led Richard Posnera prominent judge, phd thesis on stock market volatility, University of Chicago law professor, and innovator in the field of Law and Economics, to back away from the hypothesis.

Posner accused some of his Chicago School colleagues of being "asleep at the switch", saying that "the movement to deregulate the financial industry went too far by exaggerating the resilience—the self healing powers—of laissez-faire capitalism.

Despite this, Fama phd thesis on stock market volatility conceded that "poorly informed investors could theoretically lead the market astray" and that stock prices could become "somewhat irrational" as a result. The theory of efficient markets has been practically applied in the field of Securities Class Action Litigation. Efficient market theory, in conjunction with " fraud-on-the-market theory ", phd thesis on stock market volatility, has been used in Securities Class Action Litigation to both justify and as mechanism for the calculation of damages.

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Oct 04,  · A multi-factor quadratic stochastic volatility model with applications in finance and insurance. Explain Market efficiency considering emerging economies. Investment Opportunity in Stock Market with Special Focus on Oil Sector; Investors and private equity market in the UK Impact of Cash Flow Volatility on Stock Returns: Evidence from Pakistan Stock Market: Fall Management Sciences: Download: MMS Muhammad Shahid: The Impact of Earning Volatility and Cash Flow Volatility on Firm Value: Evidence from Pakistan: Fall Management Sciences: Download: MMS Muhammad Abouzar The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information