Business Finance (Lecture 2)

1. January 18th: Volatility modeling and forecasting
1. Questions: Is volatility forecasting important? Why?
2. Do you think that volatility can be forecasted?
3. What other parameters do you think should be taken into account in the volatility forecasting process?
4. Does research on volatility forecasting conflict with the Efficient Market Hypothesis (EMH)?
2. January 25th: Technical and Fundamental Analysis (Today's Lecture)
1. How tomorrow's managers utilize information in order to make sound financial decisions.
2. Credit rating agencies comes to mind. They carry out tech. and fundamental analysis in order to rate debt.
3. Efficient Market Hypothesis - (Chapter 14 of text) Prices reflect all relevant information
1. semi-strong form
4. Do prices actually move in trends?
5. Does history repeat itself?
6. Do patterns become self fulfilling prophecies?
7. How subjective are TA rules?
8. Moving Averages: basically the sum of the closing prices over a certain period divided by that period
1. Example: 20 closing prices of an index  (dollars) / 20 (days)
2. when the price meets the MA line from above, sell
3. when the price meets the MA line from below, buy
4. Does MA work? Empirical evidence
1. 1988 Lucak
9.  Price Patterns: (Head and Shoulders)
1. stock price resembles a head and shoulders, very subjective
10. Fundamental Analysis- define a securities intrinsic value
1. compare with Peers, use accounting data
2. qualitative data such as SWOT analysis
3. industry life cycle
4. value investors, activist value investors
11. FT on Rating agencies
12. Misreading the data: "If you interrogate the data too much it will confess."