Behavioural Finance Limits Of Arbitrage Essay Example Pdf - Free Essay Example

Sample details Pages: 6 Words: 1859 Downloads: 7 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? Behavioural Finance does not negate the arbitrage mechanism per se and its price correcting ability. However, it argues that not every deviation from fundamental value created by actions of irrational traders will be an attractive investment opportunity for rational arbitrageurs (Szyszka, ). Even when an asset is highly mispriced, many arbitrage strategies which are designed to correct and eliminate the fundamental mispricing, are ultimately risky and costly for the arbitrageur. Therefore many strategies are perceived to be unattractive which results in the mispricing remaining unchallenged for a comparatively long period of time. The theory of arbitrage can be traced back to Friedman (1953), he stated that rational traders will quickly undo any mispricing caused by irrational traders. An example to illustrate this argument is cited in Baberis and Thaler (2002) Suppose that the fundamental value of a share of Ford is $20. Imagine that a group of irrational t raders becomes excessively pessimistic about Fords future prospects and through its selling, pushes the price to $15. Defenders of the EMH argue that rational traders, sensing an attractive opportunity, will buy the security at its bargain price and at the same time, hedge their bet by shorting a substitute security, such as General Motors, that has similar cash flows to Ford in future states of the world. The buying pressure on Fords shares will then bring their price back to fundamental value. Friedmans argument is based on two underlying assumptions. Firstly, as soon as an asset deviates from its fundamental value, an attractive investment opportunity will arise from this mispricing. Secondly, rational traders will immediately react to the situation by purchasing the asset, thereby correcting the mispricing. Behavioural Finance doesnt dispute the fact that an attractive investment opportunity will be exploited, it argues that arbitrage strategies that are developed to correct the mispricing can be both risky and costly, resulting in the mispricing remaining unchallenged. Fundamental Risk When an arbitrageur observes a mispriced asset on the market, they need to find a similar asset which is priced correctly on another market, to enable them to correct this mispricing. Thus, taking an opposite arbitrage position. If the trader is unable to take up this position they face fundamental risk. That is, the risk that new information comes to the market and changes the fundamental value of the asset in the wrong direction. Referring back to the example of Ford and General Motors cited Baberis and Thaler (2002), if the trader buys Fords stock at $15, but then there is bad news in the market which causes the stock to fall below the initial purchase value, this will result in losses for the trader. Even if the arbitrageur has a short substitute security such as General Motors, the problem is, substitute securities are rarely perfect and often highly imperf ect, making it almost impossible for the trader to remove all the fundamental risk. Therefore, by shorting Generla Motors, it protects the arbitrageur against adverse news about the car industry as a whole, however, it still leaves them exposed to bad new that is specific to Ford. Even when arbitrageurs are able to hedge the fundamental risk that they face and take a long position in the asset where it is cheaper and a short position in the same asset on another market where it is more expensive, the trader is still exposed to Noise Trader Risk. Noise Trader Risk Noise trader risk can be defined as, the risk that irrationality on the market may become stronger and may drive mispricing to an even grater extent (Shleifer Vishny (1997). As the mispricing increases, the gap between long and short positions increases which in turn goes against the belief of rational arbitrageurs. If this trend continues, an arbitrageur whose investment horizon is usually relatively short and wh o often borrows money to fund their trades, may be forced to close their positions before the mispricing is corrected, ultimately resulting in them suffering significant losses. Shleifer (2000), has argued that noise trader risk, the risk from traders who are attempting to buy into rising markets and sell into declining markets, limits the extent to which one should expect arbitrage to bring prices quickly back to rational values, even in the presence of an apparent bubble. Even the most rational arbitrageurs will regret selling a share short which may collect a greater price in the future, even if that price is unreasonably high. Noise traders can be defined as those whose investment decisions rely more on psychological factors than on sound investment management principles (Friedman, 1953). According to the EMH, an irrational investors trading cannot be effective in the long run as efficient rational arbitrageurs will counteract their trades eliminating them from the market. Fu rthermore, noise traders buy and sell shares in an uncorrelated random manner and in turn their trades cancel each other out, leaving asset prices unaffected. However, the evidence of persistent anomalies in the stock market dictates that noise traders can most definitely affect equilibrium prices even in the long run. According to De Long et al (1990), this is because rational arbitrage in reality is not only limited but can also create by itself price inefficiency under certain circumstances. The understanding behind the ability of noise traders to alter the fundamental value of a stock lies in the limitations faced by rational arbitrageurs. The two main limitations are short investment horizons and risk aversion. Rational arbitrageurs cannot entirely eliminate the effects of noise traders on the market if the size and the ability of the former group to trade are very limited (Camerer, 1989). Consequently, a single arbitrageur who notices a mispricing in the market faces not only the noise trader risk, but also the risk of synchronization of actions of other rational traders (Abreu Brunnermeier (2002). Typically a single arbitrageur does not have the momentum to correct the mispricing on their own. The individual needs other arbitrageurs who will follow his strategy. However, the individual does not know if and how quickly other rational traders will react to the same arbitrage opportunity and take up a similar positions. Also, the risk aversion of arbitrageurs by itself limits their ability to cancel noise traders, even if arbitrageurs have infinite buy-and-hold horizons (Shiller, 1984). As stated by Black (1986), if noise traders undervalue or overvalue stocks for a long period of time, the short horizon under which arbitrageurs performance is evaluated limits their ability to force asset prices back to their fundamental values. As a result, due to the limitations of arbitrage noise traders are able to force asset prices away form their equilibrium value for extended periods of time. Rational arbitrageurs also have to realise that noise trader strategies may become even more extreme and unpredictable, resulting in increased risk for the arbitrageur. This additional risk can be referred to as noise investor risk. Noise investor risk is systematic and non-diversifiable which in turn creates additional volatility on the stock markets. Rational arbitrageurs would not bear this risk unless compensated with higher expected returns (De Long et al., 1990). This once again limits the successfulness of rational arbitrageurs. Implementation Barriers Arbitrage can become a costly activity for a number of reasons. Firstly, transaction costs which include bid-ask spreads, commissions and price impact can limit the arbitrageur in exploiting an obvious mispricing. Secondly, the fees charged for borrowing stocks to take a short position can often be off-putting. As cited by Baberis and Thaler (2002), DAvolie (2002) finds That for most stocks, they range between ten and fifteen basis points but they can be much larger; in some cases, arbitrageurs may not be able to find shares to borrow at any price. A further barrier they may face is legal constraints. For example, in many large pension funds short-selling is prohibited altogether. Finally, the vast amount of research and learning required to exploit a mispricing in a further deterrent. Shiller (1984) found that even if noise trader demand causes a persistent mispricing it ay not be detectable for arbitrageurs without large amounts of time and resources. Evidence Limits of arbitrage have been confirmed empirically by cases of evident mispricing that remain unchallenged in the market for long periods of time. An example of this is the case of twin shares. In 1907, Royal Dutch and Shell merged their interests on a 60:40 basis while both remaining separate entities. The stocks of Royal Dutch traded mostly on the US and Dutch Stock Exchange and were to claim 60 percent of the total cash flow, while shares in Shell which traded in the UK were to claim 40 percent of the total cash flow of the two firms. Theoretically, the market value of Royal Dutch equity should always be 1.5 times greater than the market value of Shell. Empirical evidence shows that Royal Dutch was sometimes 35 percent underpriced relative to Shell and at times they were 15 percent overpriced. It took until 2001 for the shares to finally sell at their correct values. This is a key example where two shares that are perfect substitutes to each other would allow the opportunity of easy arbitrage profits. The main risk in this situation is noise trader risk, there is the fear that the share will become even more undervalued in the near future. A further example of the limits of arbitrage comes form carve-outs. This involves transactions when a publicly listed mother company sells a majority stake in its daughter company in the Initial Public Offer (IPO). Baberis and Thaler (2002) give an empirical example of this. In March 2000, 3Com sold 5 percent of its wholly owned subsidiary Palm inc. in an IPO, retaining the remaining 95 percent. After the initial offer, a shareholder in 3Com indirectly owned 1.5 shares of Palm Inc. At close of business on the first day after the offering, Palm Inc. shares were valued at $95, putting a theoretical value of 3Com at $142 per share. What actually happened was 3Coms trading price was $81 per share, implying a market valuation of 3Coms business out side of Palm Inc. at around minus $60 per share. In this extreme case the market value of stocks offered by the IPO was higher than the valuation of the whole mother company holding a majority stake in the daughter company. This mispricing occurred for several weeks. Baberis and Thaler (2002) analyse this case and argue that implementation costs prevented arbitrageurs profiting from this mispricing. Yet another example comes from the inclusion of a new stock on the SP 500. Schleifer (1986) discovered that when a stock is added to the index, on average, the price jumps by 3.5 percent and much of this increase remains. A prime example of this is when Yahoo was added to the index, its share price rocketed 24 percent in a single day. Arbitrage is limited in this case due to the fundamental risk and noise trader risk faced by traders. They may find it is very difficult to find a substitute stock and also there is the risk that the price will continue to rise in the short run. In the case of yahoo, its share price was $115 before its addition in the index and it had risen to $214 a month later. In all of these above examples, rational arbitrageurs face risks, costs and problems with their fundamental strategies which makes arbitrage unappealing for the trader.. Don’t waste time! Our writers will create an original "Behavioural Finance Limits Of Arbitrage Essay Example Pdf" essay for you Create order

Strategies for Transitioning Preschool with Autism...

This is an article review of Anthony M. Denkyirah and Wilson K. Agbeke 2010, which investigated the Strategies for Transitioning Preschool with Autism Spectrum Disorder to Kindergarten. The article was published in Early Childhood Education Journal. Research (Rice and O’Brien (1990), Rule et al. (1990), and Wittmer et al. (1996) found that an Autism Spectrum Disorder (ASD) children who sustained suitable services in their preschool years, they are able to face academic challenges and try to continue developing their cognitive, living and social skills. How the children with ASD adopt the transition to kindergarten it’s depend partly on how the teachers control, manage and develop strategies when working with their family. This research†¦show more content†¦Parents and teachers need to identify factors strengthening them like giving cookies or other, in addition to the praise given. Two major types experience by ASD children are vertical and horizontal transition. Where vertical transition is like preschool program to kindergarten, while horizontal transition for the development and predictable scope. Parents and teachers can also use social reinforcement to ensure that they show good behavior and keep learning. It is important to maintain a regular schedule is followed, making the environment as something to be expected by the child. When the need to make changes, guardian or teacher must be prepared for children with autism will become uncomfortable and show resisting behavior. While in communication, the increase can be done using the appropriate movement and gestures. DISCUSSION OF IMPLICATION Based on the study, only teachers with special education qualification were credential to participate in this case. Of course the one who had taught or were teaching preschool with Autism Spectrum Disorder children are selected for this survey. For private school like mine, it is very difficult to deal with ASD children because we don’t have qualification towards that. The parents supposed send their children to special school but they don’t. Some of them denied or cannot accept that their children have this kind of problem. As parents they want the

The Influence of Technology in Human Resource Management Free Essays

Information technology, also known as IT, has drastically changed the workplaces of the world in the past 50 years. The field of human resources has historically been limited to a clerical or administrative role in the business arena, dealing mainly with tasks like payroll or attendance. In the modern market, new core HR responsibilities include recruitment and training, oversight of legal and regulatory compliance, benefits administration and the safeguarding of confidential employee information, along with many more. We will write a custom essay sample on The Influence of Technology in Human Resource Management or any similar topic only for you Order Now These tasks cannot be carried out effectively without the use of high-tech tools. Advances in technology have not only made the handling of basic administrative tasks more efficient, they have expanded the role of HR and created new disciplines within the field. Database management systems are a prime example of how technology has facilitated the growth and expansion of the HR field. Using a DBMS streamlines the management of employee information. Data entry and tracking, analysis of employee information, benefits administration and applicant tracking are all made easier and less time consuming, with the information available and organized with the punch of a key (Laudon and Laudon, 165). Human resource outsourcing is a rapidly growing field all on its own. Many businesses, small and large alike, are turning to HR specialization firms such as Aon Human Capital Services, Hewitt Associates, and Affiliated Computer Services. The Braun Consulting Group reported that while saving money is the reason for outsourcing for about half of the companies surveyed, gaining outside expertise, improving service quality, and being able to focus on their core business were also cited as key motivators. These companies characteristically offer services in four principal areas of HR functionalities: payroll, time and labor management, benefits administration, and HR management. Some of the most widely used software applications are payroll and compensation management software. Payroll software is designed to automate payroll tasks, including managing payroll tax issues like federal and state calculations. Additionally, payroll software assists in creating paychecks, filing tax forms, and creating employee tax records. Compensation management oftware automates salary reviews, plans, and budgeting to name a few. This software may be hosted in-house by the operating organization, or may be web-based. Web based providers include Oasis Outsourcing, Intuit, and Amycheck. These service providers have assisted small businesses and large corporations alike in streamlining payroll and benefits management. Employee recruitment and training are widely considered to be two of the most important t asks in human resource management. Attracting and retaining competent, reliable employees is necessary for success in any business. The advent of the Internet has drastically altered the way organizations search for candidates, and vice versa. The Internet allows businesses to reach a much greater pool of candidates with a greater range of knowledge, skills, and abilities, which in turn increases the odds of finding a good match for the position(s). Larger organizations often employ their HRIS departments in developing in-depth company websites with detailed job descriptions and requirements, as well as the organization’s mission statement and corporate culture, in an effort to attract employees that fit with the attitude and values of the company. Smaller organizations cannot afford to create and maintain a large and often expensive website like this, but there are many options for outsourcing online recruitment. In addition to outsourced companies, large job posting websites such as Monster. com are popular sites for people searching for jobs to post resumes and search for a wide range of openings. Technology has also been implemented in training employees. E-learning is a widely used tool in employee training and development. The term â€Å"E-learning† includes any form of training done with electronic support. This includes online training and development, tele-class training, chat room training, and video training. The advantages of these forms of training include convenience and the ability to control the pace of the instruction. The use of this medium, however, should mainly be limited to teaching the basic concepts and skills needed for the job, with more in-depth classic training for more specific skills or needs (Smith and Mazin 69). â€Å"Communication is the key to any change† (Rudnick, 45). In any business, ffective communication between employees, managers, and customers is not just a nice perquisite, it is vital to the success (or failure) of the organization. The era of paper memos, faxes, and â€Å"regular† mail is on its way out the door. Email has rapidly become the most widely used form of communication in the business world. Instant messaging, internal databases, and bulletin boards are also well used to communicate with suppliers, employees, and customers al ike (Laudon and Laudon, 191). The explosion of cellular phone and smartphone usage has also transformed the way organizations do business. Many organizations are allowing employees to work more hours from home, conducting business over the internet and phone. Hours are more flexible, and it is no longer necessary for a physical presence in the office for a large portion of the work. Communications with customers are also altered. The Internet has opened a vast new market to many businesses. A webpage has the potential to introduce the company to millions of new customers, and also allows for easier payments, shopping, and ordering, all from home. Businesses also have an increased opportunity for improving customer relations, thanks to the Internet. Feedback is available almost instantly via email, online discussion forums, and social media. The speed of the feedback allows organizations more time to troubleshoot problems and build relationships with satisfied, returning customers. In HR, this growth in the means of communication has opened new paths to employee relations as well. Many times, employees have avoided complaining about valid concerns due to fear of retaliation. The ability to send emails provides a relative anonymity that allows for more freedom of communication between the human resources department and a company’s workers. This also allows more ready access to information such as disciplinary guidelines and employee handbooks; keeping employees informed helps to improve the overall attitude of the workplace. One of the newest trends is social networking sites. Millions of people are registered with such sites as Facebook, MySpace, or LinkedIn. A TUC briefing on social media and HR lists some of the larger issues surrounding the use of these sites. Usage of these sites by employees certainly could be trouble for human resource managers. There is the worry that accessing these sites during work hours, on work stations, will interfere with productivity. Also, the conduct of employee’s on these websites has become a potential concern. Posts dealing with breaches of commercial confidentiality or undermining a company’s reputation could potentially require disciplinary action. These issues are still controversial at this point. Many advances in technology pertain to assisting disabled people in performing everyday tasks that they would otherwise be unable to do. As Don Dalton says, these solutions â€Å"remove the â€Å"dis† from various disabilities† and make their transition into the workforce much easier. This allows companies to hire a more diverse staff and keeps them compliant with EEOC. For people with physical impairments, Dalton lists a wide variety of available technology that can assist in using a computer, for example. The most cost effective is voice recognition software, but there are also many different types of keyboards as well as a head-mounted mouse controller that can be obtained for use in the workplace. Blind people also have options available. Speech synthesizers, document readers, and screen review packages give the blind the ability to access computer documents as easily as those who can see. These technologies and more allow companies to be compliant with the Americans with Disabilities Act of 1990. With this explosion of connectivity and technology in the workplace, security is also a huge concern. Hacker, theft, fraud and vandalism have been a classic worry of a business’s databases (Laudon and Laudon, 232). With the growing computer literacy of the workforce, and the growing use of computers at work for personal reasons, organizations are becoming more worried about threats from online sources to their networks. Malware became the leading threat to business’s online security in 2007 (Dumitru, 2). While these problems may seem to be a problem for the IT department, the human resources department should also keep up to date on computer security as well. The information in employee files is sensitive, and every precaution should be taken to insure it stays private, including tough security policies as well as strong firewalls. â€Å"The greatest tragedy in America is not the destruction of our natural resources, though that tragedy is great. The truly great tragedy is the destruction of our human resources by our failure to fully utilize our abilities, which means that most men and women go to their graves with their music still in them. Oliver Wendell Holmes said it best. The abilities, knowledge, and talents of an organization’s workforce are the biggest assets. Without qualified, motivated workers, any business great or small is doomed to failure. The past fifty years have been a remarkable tale of technological advances, however it should always be remembered that th e technology is here to assist and uplift men in their endeavors, not replace them. These advances have transformed the field of human resource management from a minor departmental position to playing a key role in the development and growth of any organization. How to cite The Influence of Technology in Human Resource Management, Essays

Traditional Classroom Learning and Online Learning- myassignmenthelp

Question: Discuss about theTraditional Classroom Learning and Online Learning. Answer: Introduction As people seek and institutions seek to improve the learning experience major shifts have been experienced in the education field especially the adoption of technology in learning. This paper aims at analyzing the similarities and differences between Classroom and online learning Similarities Assignments One of the basic similarities between online and traditional classroom learning is the fact that in both modes of learning the concept of class assignments is a reality. Whether one chooses to attend a classroom in a traditional setting, or in an online setting, they will be required to do course-related assignments from time to time (Hallam,2015). Class discussions and collaborations Discussions and collaborations are an important aspect of the learning process. In both traditional based and online class formats .team work, and discussions are practiced. While under the traditional class setting students have a chance to ask questions and offer ideas in lecture halls. Online, learning gives an opportunity for students to engage in an online discussion with fellow students and lectures. Apart from group assignments in the traditional classroom context, online learners are also given group assignments in which they communicate through mobiles phones and emails (Brosche Feavel,2011). Use of textbooks and online resources Both online learning and traditional class set up involve the use of textbooks and online resources for studying and undertaking assignments. Texts books used by both Online and traditional classroom learners studying similar courses are similar which eliminates any discrepancies in the learning process. While traditional classroom learners may be in possession of hardcopy books. Online learners may be provided with electronic books, but the content is similar (Hallam,2015). Differences Classroom setting There is a major difference in the setting of the traditional classroom and online learning. In the traditional classroom learning, several people gather together in specific classes or lecture halls at specified times to learn in a teacher driven style. The learning process may also involve Students learning through face to face discussions with their peers. In contrast, Online learning allows the learner to have a flexible learning schedule where they can choose their most convenient time and at the place of their choice. Online learning is, therefore, more user-driven in which students have control over their learning times and paces(O'Neil,et al,2009) Learning styles Both the learning styles used in traditional and online classroom setup vary. In traditional classroom setup, collaborative learning approaches which involve face to face interactions within an outside the classroom are mostly used as. This approach is quite useful for students who require academic support from time to time. Online learning, on the other hand, is based more on an independent style of learning where learners have the sole responsibility of balancing between their school and personal lives. Online programs also have a high reliance on technology as compared to the traditional classroom context (O'Neil,et al,2009) In-depth Feedback Feedback is an important component of the learning process. While feedback is used by instructors in both traditional and online learning, its levels differ in the two methods. For online courses, the level of feedback given by Instructors is higher as compared that given in a normal classroom setup. Instructors may go to the extent of providing online learners with detailed written or visual critiques of assignments. Perhaps the lack of detailed feedback in traditional classes is because the frequency of feedback in such setups is high (Information Resources Management Association,2010). Conclusion In conclusion, both similarities and differences exist between online and traditional classroom learning. The most notable similarities are assignments in the learning process, use of discussions and collaborations and use of online resources and textbooks. Major differences have to do with the type of feedback, classroom setup, and learning styles. Reference List Brosche, T. A. M., Feavel, M. (2011). Successful online learning: Managing the online learning environment efficiently and effectively. Sudbury, Mass: Jones and Bartlett. Hallam, J. (2015). Blended Online Learning versus Traditional Classroom Learning: A Comparison of Mathematics Content Mastery for High School Students of Homeowners and Non-Homeowners. Information Resources Management Association. (2010). Web-based education: Concepts, methodologies, tools and applications. Hershey, Penn: Information Science Reference. O'Neil, C. A., Fisher, C. A., Newbold, S. K., Newbold, S. K. (2009). Developing online learning environments in nursing education. New York: Springer.