1. Good Afternoon – 10/18/05

2. Review from last time Behavioral finance and technical analysis A yahoo example Begin Chapters 14 – 18 – Fed stuff

3. Chapter 7 – rational expectations

4. Rational Expectations Trying to predict how long it takes to get to work (textbook, CH. 7) Are you always right? What are the properties of the forecast errors?

5. Properties of error term Mean of zero Unpredictable with current information set Uncorrelated with itself

6. So what are rational expectations? You do the best with the information set that is available to you. A soon as new (relevant) information arrives, you change you expectations (how quickly?) Football example again!

7. How can you make money in the stock market? On overhead, be sure to discuss all the variables needed to be successful in terms of making the best forecast possible!

8. Discuss why that was a waste of time!

9. A formal look at the forecasting model and properties of error term (on overhead)! A test of the efficient market hypothesis

10. Properties of error term Mean of zero Unpredictable with current information set Uncorrelated with itself

11. A little about regression analysis What do economists do? Theory vs applied work Recall Consumption Function (go to overhead)

13. Data – Coke – closing price – daily data; 1/2/70 – 1/25/99 – source, yahoo

15. So what does our forecasting model of coke look like?

19. And finally, a look at trying to predict the error term with past information

22. Picking up some loose ends

23. Terms from Finance Portion of course – we discussed all but the terms in black font 1. Options – calls, puts, strike price, writing options. 2. Derivatives – what does this term mean? 3. Stock price determination – formula 4. The efficient market theory. 5. Autoregressive properties. 6. Technical analysis.

24. 7. Shorting stocks and short covering. 8. NEWS. 9. Jawboning. 10. Price to earnings ratio. 11. Earnings per share. 12. Futures. 13. Closing position. 14. Hedging. 15. Inside information. 16. Random walk. 17. Bulls vs. Bears. 18. Exercise. 19. In the money.

25. Discuss Behavioral Finance Definition : Behavioral Finance (BF) is the application of psychology to finance. It is based on the study of behavioral biases and their effects on financial markets, such as anomalies & inefficiencies on prices and returns. BF tries to detect and understand those biases / anomalies, and if possible to use them in investment strategies. Here is another link http://www.wordiq.com/definition/Behavioral_fin ance http://www.wordiq.com/definition/Behavioral_fin ance

26. Behavioral Finance Discuss day trading and Google, Amazon.com, etc See article that is now posted

27. Since efficient market theory suggests that it is impossible to beat the market – let’s move on to technical analysis

28. Example – Bollinger Bands Go to new posting on Bollinger bands Then go to Yahoo finance -

29. Begin Fed stuff – open market operations