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14127_lec12habit

14127_lec12habit - 14.127 Behavioral Economics Lecture 12...

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14.127 Behavioral Economics. Lecture 12 Xavier Gabaix April 29, 2004
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0.1 Twin stocks Shell and Royal Dutch – claims on the same company There is a di ff erence between prices The di ff erence is driven by the di ff erence in aggrogate movements in Lon- don vs Dutch stock markets Sharpe ratio (expected return/standard deviation) of this aribtrage is not great
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0.2 Are noise traders eliminated from the market? DSSW setup E ( R NT R A ) = E λ NT t λ A t ´ ( r + p t +1 p t (1 + r )) i = ρ (1+ r ) 2 ( ρ 2 + σ 2 ) 2 γµσ 2 ρ Might be both positive and negative If γ is large enough, then E ( R NT R A ) > 0 and noise traders prevail This is because noise traders are more optimistic and take more risk But by construction EU A > EU NT
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Stock returns look like a random walk [see slides] Evidence from stock splits – supports e cient market hypothesis [see slides] Event study methodology [see slides] Jensen: “The E cient Market Hypothesis is the best established fact in all of social sciences” de Bondt and Thaler JoF 1985 [see slides]
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