lec11b - 14.127 Behavioral Economics. Lecture 11...

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14.127 Behavioral Economics. Lecture 11 Xavier Gabaix April 22, 2004 Introduction to Behavioral Finance
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2 Finance Andrei Schleifer, Efficient Markets (book) 2.1 Closed end funds Fixed number of shares traded in the market The only way to walk away is to sell fund’s share
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NAV Net Asset Value is the dollar value of single share computed as the value of the assets inside the shell net of liabilities divided by the number of the shares Discount = (NAV-Share Price)/NAV The discount substantially decreased in early 80s.
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2.2 Simplest limited arbitrage model One risky asset Q and one riskless asset (interest rate r ) Two periods, t = 0 trading, ¯ t = 1 dividend D = D + σz where z N (0 , 1) CARA expected utility U ( x ) = e γx . Buy q of the stock at price p and put W q in bonds.
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± Payoff x = qD + (1 + r )( W pq ) and ( qD +(1+ r )( W pq )) EU = Ee γ Use Ee a + bz = e a + b 2 2 and get ¯ EU = e γ
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This note was uploaded on 12/26/2011 for the course ECON 14.127 taught by Professor Staff during the Fall '10 term at MIT.

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lec11b - 14.127 Behavioral Economics. Lecture 11...

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