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The Stock Market - Coggle Diagram
The Stock Market
Pricing a common stock
The One-Period Valuation Mode
The generalized dividend valuation model
The Gordon growth model
Stock price determination
The price is set by the buyer who is willing to pay the
highest price
The price is set by the buyer who can take best advantage
of the stock
Application: Monetary policy and stock
prices
Theory of rational expectations and
efficient market hypothesis
Theory of rational expectations
Expectations will be identical to optimal forecast using all
available information
Implications
If there is a change in the way a variable moves, the way in which expectations of this variable are formed will change as well.
The forecast errors of expectations will, on average, be
zero and cannot be predicted ahead of time.
The efficient market hypothesis
Rational expectations in financial markets
why
rational?
Arbitrage opportunity
In an efficient market, all unexploited profit opportunities
will be eliminated
Expected return of a security at the end of t+1
According to the efficient market hypothesis, expectations of future prices equal optimal forecasts using all currently available information
In efficient market, a security’s price fully
reflects all available information
Random walk behaviour of stock prices
Without better information, you cannot beat the
market.
