Moreover, seasoned investors have stock trading software to predict when is the best time to buy or sell for maximum profits but at minimum risks. An investor can take advantage of the daily share price fluctuation if he understands how technical analysis works. It is diffi cult to stop the price fluctuation, but certainly, one can make money out of it. So, the pertinent question is why do stock prices change? The best answer is that nobody really knows for sure.
Review of the investor preferences theories 1.1 Irrelevance theory: Modigliani and Miller (MM) Modigliani and Miller first paper in (1958) was about the value of the firm and the conditions under which the financial leverage doesn’t affect the firm’s value. In (1961) Modigliani and Miller second’s paper “dividend policy, growth, and the valuation of shares” In this paper, (M&M) showed the circumstances under which dividend policy doesn’t affect the firm’s value. However, the debate about dividend policy and its effect on the firm’s value continue. The (MM) theory argued that; • The firm’s value is determined only by the power of its earnings, which means that the firm’s value depends only on the return generated by its assets • The (MM) theory concluded that the dividend policy doesn’t affect the firm stock’s value and dividend policy doesn’t affect the required rate of return on stock The (MM) theory recognizes that shareholders can construct their own dividend policy; an investor can sell shares if the company doesn’t pay dividends, and also he can buy more company’s shares if the company pays high
The real stock market is very close to the theoretical concept of the classical market. As a result, questioning the rationality of traders in the stock market would have lasting consequences for the way rational traders are depicted in other markets that do not have instantaneous transactions and have higher barriers to entry (Marsh and Merton, 1984). This importance of primarily testing the stock market for efficiency instead of other markets explains the focus of this paper on the stock market. The concept of the efficient market is contradictory to one of humans' principles. Effort and experience lead to better results.
The new approach presented in this article included portfolio formation by considering the expected rate of return and risk of individual stocks and, crucially, their interrelationship as measured by correlation. Prior to this investors would examine investments individually, build up portfolios of attractive stocks, and not consider how they related to each other. Markowitz showed how it might be possible to better of these simplistic portfolios by taking into account the correlation between the returns on these stocks. The diversification plays a very important role in the modern portfolio theory. Markowitz approach is viewed as a single period approach: at the beginning of the period the investor must make a decision in what particular securities to invest and hold these securities until the end of the period.
How reference point effects investor behavior was studied under different economic conditions. Earlier, Shaffrin and Statsman termed the effect of reference point as dispositional effect. This research paper was called an experimental analysis as the research analysis was not based on real market information and was based on investors behavior and decision making which varies with time, conditions and economic situation. This theory explains how reflection effect and reference point effects can together lead to disposition effect. Consider original purchase price of stock as P; the fall in value from P as L (loser stock); Consider further fall in price of stock as 2L; similarly, consider raise in value from purchase price as G(winner stock) and further increase in value from G as 2G .There is an assumption that people value gains and losses from the reference
What is CAPM According to Rabeea Sadaf and Sumera Andleeb (2014), the capital asset pricing model (CAPM) is a tool can be apply to define a theoretically appropriate required Rate of Return of an asset. The CAPM was developed by Jack Treynor (1961, 1962), William Sharpe (1964), John Lintner (1965a, b), according to them the systematic risk need to consider when investor calculating a deserved return as it is uncontrollable and unavoidable even they diversified away; for the unsystematic risk of that asset can be assumed zero because stock's return that is not correlated with general market moves. The CAPM concept states that the return on an individual stock, or a portfolio of stocks have to equal its cost of capital which then is a linear
Last but not least, market timing theory is the last theories of capital structure. Market timing is known as a short-term trading strategy where the investor will prognosticate the market movement in order to make the best trading decision to maximize their benefit or wealth. This theories means that the investor will treat market as a place that the buying and selling of stocks can be carried and they make their decision based on the predicted future market price movements. The prediction of market price movements may base on technical or fundamental analysis as main source of data. In other words, market timing is an investment tactic that emphasis more on the perspective of aggregate market compared to those that specific on certain financial
1 Introduction We define Value at Risk (VaR) is a measure of market risk of an asset or a portfolio. Financial institutions across the world use VaR to estimate the impact of future market fluctuations on their portfolios. However, there is no hard and fast rule that only financial institutions can use VaR. It is because, VaR simply tells the risk exposure of an entity to market conditions. Thus, one could compute the VaR for an oil marketing company in terms of crude oil price risk.
This means that the income we receive is not planned or based on assumptions, but is the actual income derived. It is therefore reliable and exact and tells us about our real income. For Example: 1) An employee planning for upgradation in his curriculum vitae thinks of joining a course and after finishing the course analysis increase in this earning capacity, this will be this Ex-Post Income. 2) A company wants to know the sales of newly launched product in the market, so here the Ex-Post income will be only determined after launching the product and then analyzing the income. Why is it necessary to take into account the closing stock in preparing a trading
The causal impact of volatility on margin requirements is evidenced by the adjustments in required margins that occur following significant changes in the volatility of the futures market. Therefore, it is desirable to explicitly account for the stochastic properties of futures market volatility in determining initial margins. Since there is no closed-form solution for the value of a barrier option when volatility is stochastic, the adaptation of this approach to incorporate stochastic volatility requires a numerical valuation approach. The fat-tailed unconditional price distributions that are of concern to the futures exchange in setting margin policy can be approximated using either the time-varying volatility model used here or a jump-diffusion model. Although Bates and Craine (1999) use the jump-diffusion model for their analysis of clearinghouse exposure, their data are characterized by high frequency, low amplitude jumps that are also consistent with our time-varying volatility