The Behavior of Financial Markets under Rational Expectations [Hardback]

Yan Han (Author)

ISBN: 9781626430877 | Published by: Bridge 21 Publications | Year of Publication: 2022 | Language: English 136p, H229 x W152 (mm)

The Behavior of Financial Markets under Rational Expectations


The financial markets have become more and more important in modern society. Their behaviour and impact relies crucially on the behaviour of market participants, aka the investors of different types. Although descriptions of the financial markets on the macro level have caught the attention of investors, regulators, and the ordinary people, how the market participants interact with each other in the financial market may provide deeper insights on how and why the financial markets behave.

This book explores the micro level of financial market behaviour. The author has been undertaking financial research, especially on the micro level, during the past two decades. The academic research on this broad area has undergone a rapid growth, with new results, methods, theories, and even paradigms, emerging and burogeoning almost every year. As a financial researcher in one of China’s top universities, the author has kept monitoring, digesting, and synthesising the research articles in the area.

This book is the outcome of this decades-long routine research work of the author, covering the fundamental economic theories of how different investors receive and interpret information. The empirical results of investors' behaviour are also discussed in depth, along with the basic academic techniques of modelling investors' behaviour.

Table of Contents

1 Information 1.1 Rational expectations 1.2 Different opinions 1.3 Information Aggregation and learning 1.4 How do Agents Learn New Information 1.5 Information and pricing 1.6 Further issues of learning and reacting 1.7 Information providers 2 How are Prices Formed? 2.1 The Perspective of Asset Pricing Literature 2.2 Inventory Costs Based Microstructure Models 2.3 Information Based Microstructure Models 2.4 What is Risk? 2.5 Trading mechanism . 2.6 Short selling 2.7 Other Topics in Microstructure 3 Liquidity 17 3.1 Measuring Liquidity 3.2 Volume . 3.3 Determinants of Liquidity 3.4 Market’s and Liquidity Providers’ Conditions and Liquidity 3.5 The Effect of Liquidity on the Firm’s Well Beings 3.6 Who is Providing Liquidity 4 Limit Orders 4.1 The Models of Limit Orders 4.2 Investor’s Choice of Limit versus Market Orders 4.3 Limit Order Revisions and Aggressiveness 4.4 Limit Order Patterns . 5 Depicting investors 5.1 Theory Based Investor Taxonomy 5.2 Identity Based Investor Taxonomy 5.3 Investor sophistication 5.4 Herding and correlated trading . 5.5 Trading behavior 6 Mutual Funds 6.1 Fund Performance and Fund Manager Skills 6.2 Funds herding . 6.3 Incentives and the risk shifting 6.4 Fund Flow and Investor’s Preferences 6.5 Fund Fees 6.6 Governance of Funds 7 Prices of IPO and SEO 46 7.1 Why and When to Issue New Equities 7.2 Choice of Issue Types . 7.3 New Issuance Pricing . . 7.4 Trading around IPO and SEO 7.5 Market Reaction and Long Term Performance 8 Behavioral Explanation 51 8.1 General discussion on the behavioral explanation . 8.2 Disposition effect and prospect theory 8.3 Overconfidence and Over-reaction 8.4 Awareness, familiarity, and Attention . 8.5 Law of small numbers 8.6 Rational structural uncertainty models 9 Modeling economic behavior 9.1 Nash Equilibrium 9.2 Bayesian Games 9.3 Utility maximization models 10 Mathematical Techniques for Economic Modeling 64 10.1 Difference Equations 10.2 Differential Equations 10.3 Fixed Point 10.4 Static Optimization 10.5 Duality 11 Empirical Methodology 11.1 Regressions 11.2 Non-Regression Methods 11.3 Endogeneity 11.4 Measurements Bibliography

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