Momentum (finance) In finance, momentum is the empirically observed tendency for rising asset prices to rise further, and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month.[1][2] The existence of momentum is a market anomaly, which finance theory struggles to explain. The difficulty is that an increase in asset prices, in and of itself, should not warrant further increase. Jump up ^ Jegadeesh, N; Titman S (1999).
CFA Institute Publications: Financial Analysts Journal - 51(4):21 - Abstract Although earnings surprises have been studied extensively, they have not been examined in the context of contrarian strategies. Positive and negative earnings surprises affect “best” (high-P/E) and “worst” (low-P/E) stocks in an asymmetric manner that favors worst stocks. Long-term reversion to the mean, in which worst stocks display above-market returns while best stocks show below-market results, regardless of the sign of the surprise, continues for at least 19 quarters following the news. These results are consistent with mispricing (overreaction to events) prior to the surprise, and a corrective price movement after the surprise is consistent with extant research on underreaction. The mispricing-correction hypothesis explains the superior returns of contrarian strategies noted here and elsewhere in the literature. Topics Behavioral Finance Portfolio Management Equity Portfolio Management Strategies Author Information David N. Michael A. Cited by First Page Image
Keynesian economics The theories forming the basis of Keynesian economics were first presented by the British economist John Maynard Keynes in his book, The General Theory of Employment, Interest and Money, published in 1936, during the Great Depression. Keynes contrasted his approach to the aggregate supply-focused 'classical' economics that preceded his book. The interpretations of Keynes that followed are contentious and several schools of economic thought claim his legacy. Keynesian economists often argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, in order to stabilize output over the business cycle.[2] Keynesian economics advocates a mixed economy – predominantly private sector, but with a role for government intervention during recessions. Overview[edit] Theory[edit] Concept[edit] Excessive saving[edit]
Security (finance) A security is a tradable asset of any kind.[1] Securities are broadly categorized into: The company or other entity issuing the security is called the issuer. A country's regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities may be classified according to many categories or classification systems: Securities are the traditional way that commercial enterprises raise new capital. Investors in securities may be retail, i.e. members of the public investing other than by way of business. Corporate bonds represent the debt of commercial or industrial entities. Euro debt securities are securities issued internationally outside their domestic market in a denomination different from that of the issuer's domicile. Hybrid securities combine some of the characteristics of both debt and equity securities.
Arbitrage Arbitrage-free[edit] Conditions for arbitrage[edit] Arbitrage is possible when one of three conditions is met: Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete. In practical terms, this is generally possible only with securities and financial products that can be traded electronically, and even then, when each leg of the trade is executed the prices in the market may have moved. In the simplest example, any good sold in one market should sell for the same price in another. See rational pricing, particularly arbitrage mechanics, for further discussion. Mathematically it is defined as follows: where and denotes the portfolio value at time t. Examples[edit] Price convergence[edit] Arbitrage has the effect of causing prices in different markets to converge.
Warren Buffett: How He Does It It's not surprising that Warren Buffett's investment strategy has reached mythical proportions. A $8,175 investment in Berkshire Hathaway (NYSE:BRK.A) in January 1990 was worth more than $165,000 by September 2013, while $8,175 in the S&P 500 would have grown to $42,000 within the aforementioned timeframe. But how did Buffett do it? Buffett's Philosophy Warren Buffett follows the Benjamin Graham school of value investing. Warren Buffett takes this value investing approach to another level. He chooses stocks solely based on their overall potential as a company - he looks at each as a whole. Buffett's Methodology Here we look at how Buffett finds low-priced value by asking himself some questions when he evaluates the relationship between a stock's level of excellence and its price. 1. Looking at the ROE in just the last year isn't enough. 2. 3. 4. 5. 6.
Stock valuation In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit from price movement – stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall. In the view of others, such as John Maynard Keynes, stock valuation is not a prediction but a convention, which serves to facilitate investment and ensure that stocks are liquid, despite being underpinned by an illiquid business and its illiquid investments, such as factories. Fundamental criteria (fair value)[edit] Stock valuation methods[edit] Stocks have two types of valuations. The fundamental valuation is the valuation that people use to justify stock prices.
Iowa Electronic Markets Iowa Electronic Market for 2008 Democratic National Primary. The Obama spike in February is a result of Super Tuesday. The Iowa Electronic Markets (IEM) are a group of real-money prediction markets/futures markets operated by the University of Iowa Tippie College of Business. Unlike normal futures markets, the IEM is not-for-profit; the markets are run for educational and research purposes. The IEM allows traders to buy and sell contracts based on, among other things, political election results and economic indicators. Some markets are only available to academic traders. The IEM has often been used to predict the results of political elections with a greater accuracy than traditional polls.[1][2][3][4] A precursor to the IEM was the Iowa Political Stock Market (IPSM), invented by George Neumann, and was developed by Robert E. How it works[edit] Here are examples of contracts that the IEM traded, beginning June 6, 2006, concerning the 2008 U.S. Rules and limits[edit] See also[edit]
Nadex History[edit] "Hedgelets" come in two varieties: binary options and capped futures.[4] Binary options are bets on outcomes, "yes/no" contracts, that pay out a small dollar amount (e.g. $100) if final price of an instrument is above the strike price and nothing if below. For instance, HedgeStreet launched Germany 30 Binary Options in 2008. As of mid-2006, the company had two major investment partners.[2] The Chicago Board Options Exchange purchased a minority stake in HedgeStreet in February 2006 and assists in marketing the company's "hedgelets". In 2007, UK based IG Group announced intent to acquire HedgeStreet[5][6] and later in the year completed the purchase of the company. Soon after the acquisition, IG Group renamed HedgeStreet to the North American Derivatives Exchange (Nadex). See also[edit] References[edit]
Derivative (finance) Many money managers use derivatives for a variety of purposes, such as hedging — by taking a position in a derivative, losses on portfolio holdings may be minimized or offset by profits on the derivative. Likewise, derivatives can be used to gain quicker and more efficient access to markets; for example, it may be easier and quicker to purchase an S & P 500 futures contract than to invest in the underlying securities.[3] Derivatives are a contract between two parties that specify conditions (especially the dates, resulting values and definitions of the underlying variables, the parties' contractual obligations, and the notional amount) under which payments are to be made between the parties.[4][5] The most common underlying assets include commodities, stocks, bonds, interest rates and currencies, but they can also be other derivatives, which adds another layer of complexity to proper valuation. Still, even these scaled down figures represent huge amounts of money.