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ECON 412/452 – Behavioural Finance 2022
发布时间：2022-08-24
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ECON 412/452 – Behavioural Finance
2022
1. (a) Limits to arbitrage are a necessary prerequisite for market-level behavioural finance phenomena. Explain (i) what is meant by ‘limits to arbitrage’ and (ii) how do limits to arbitrage make market-level behavioural phenomena possible?
(15 marks)
(b) Explain the following limits to arbitrage.
(i) Noise-trader risk.
(ii) Synchronisation risk.
(iii) Implementation costs in short selling.
(iv) Execution risk in high-frequency trading.
(v) Wurgler & Zhuravskaya (2002) ‘arbitrage risk’ . Whereas other limits to arbitrage tend to be difficult to measure and quantify, Wurgler & Zhuravskaya (2002) propose a simple, operational measure for arbitrage risk. Be sure to explain this measure in your answer.
(15 marks)
(c) Present and discuss the Brunnermeier & Nagel (2004) study of the tech-stock bubble. Did sophisticated arbitrageurs arbitrage against the mispricing initially, and if so (or if not), why? Explain in detail.
(20 marks)
2. (a) Briefly describe the phenomenon of herding and discuss its possible sources.
(10 marks)
(b) Describe and discuss Froot, Scharfstein and Stein’s (1992) result that herding on the
same information could arise among rational agents.
(15 marks)
(c) (i) Briefly describe the phenomenon of informational cascade (Bikhchandani, Hirsh- leifer and Welch, 1992).
(ii) Give an example of the above phenomenon being captured under experimental
conditions.
(iii) Give an example of informational cascade applied to the financial markets.
(15 marks)
(d) (i) Briefly describe the concept of social transmission bias and self-enhancing trans- mission bias (Han, Hirshleifer and Walden, 2022).
(ii) Describe how the above concepts could help explain the popularity of active invest-
ment strategies.
(10 marks)
3. (a) “Prices are right” and “no free lunch” are not equivalent statements.
(i) Set out the complete extent of the logical relationship between these two statements. (ii) Explain the reasons behind the logical relationships you identified in part (i) above.
(iii) Discuss the implications that follow from (i) for asset-market traders, as well as the
implications for capital markets fulfilling their wider, real-economy function.
(18 marks)
(b) (i) Explain Grossman and Stiglitz’s (1980) “impossibility of informationally efficient
markets” result.
(ii) What is the nature of the equilibrium in (i), and what are the reasons for this?
(14 marks)
(c) (i) Michael Jensen’s (1978) statement of the Efficient Markets Hypothesis (EMH) has proven to be prescient. State and explain Michael Jensen’s (1978) formulation of the EMH.
(ii) State and explain Lasse Heje Pedersen’s (2015) alternative to Eugene Fama’s strong
form of the EMH. Be sure to explain what other major results and EMH defintions are closely linked with Pedersen’s (2015) formulation.
(iii) State and explain Andrew Lo’s alternative to the strong-form EMH. Be sure to also
explain the implications of this framework for asset prices and market behaviour, and comment on the associated empirical evidence.
(18 marks)
