Market theory

Is there any law in the price changes of securities in the securities market? There are several well-known theories on this point. Let’s take stocks as an example.

#Random Walk Theory (Random Walk)

Random walk theory has a very long history.

In 1827, Scottish biologist Robert Brown discovered that pollen and other suspended tiny particles in the water were constantly moving in irregular curves, and then called this unpredictable free movement “Brown” with his own name. sports”.

In 1959, Osborne put forward the random walk theory based on the principle of Brownian motion. He believes that the formation of stock prices is the market’s response to random incoming event information. Since what happens in the world is highly accidental, or random, the change of stock prices is also similar to “Brownian motion”, which is a random change ( wandering), without any pattern to follow, unpredictable.

The random walk theory has a very long history. The two books A Random Walk Down Wall Street and “The Fool Who Walked Randomly” both explained a lot of random walk theory and listed some data. The best-selling data of these two books also made The theory has been promoted, and many people still believe in the random walk theory.

However, with the passage of time, the random walk theory is gradually losing its conviction, because according to the random walk theory, no matter how wise the investor’s strategy is, in the long run, the returns obtained will not exceed the overall average level of the market, but The reality is that, whether it is the value investing school based on corporate fundamental analysis or the technical analysis school based on chart analysis, many people have earned huge profits beyond ordinary people, although the random walk theory believes that these people are “survivors”. However, this statement has been firmly opposed, such as value investors led by Buffett, who believe that in the long run, stock prices are regular, that is, good companies will eventually rise in price, and this has been generally confirmed and recognized. .

#Efficient Markets Hypothesis

Efficient Markets Hypothesis (EMH) was proposed by Eugene Fama in 1970. The “Efficient Market Hypothesis” originated in the early 20th century. He believes that if these conditions are met:

The law is sound.
All people are rational.
All information is transparent and visible without insider trading.
All information is readily available to everyone at every point in time, at no cost.

Then, the latest stock price is always the result of people rationally making judgments based on information, so the stock price always reflects all the information, and such a market is also called an efficient market.

On the basis of the efficient market theory, three hypotheses of weak-form efficient market, semi-strong-form efficient market and strong-form efficient market are proposed:

Weak form efficient market. The price has fully reflected all past historical securities price information, including stock transaction price, trading volume, short selling amount, financing amount, etc. If the weak efficient market hypothesis is established, then analyze the past price of the stock to predict the future price, It will be completely useless, and investors can only invest to obtain excess profits based on the current company’s management status and financial status. .

semi-strong form efficient market. The price has fully reflected all past historical securities price information, as well as the company’s public management status and financial information, including stock transaction prices, trading volume, profit data, profit forecasts, company management status and other publicly disclosed financial information wait. If the semi-strong efficient market hypothesis is established, investors can only invest based on the company’s undisclosed information, that is, they can only rely on inside information to obtain excess profits.

strong form efficient market. Prices fully reflect all information and there is no insider trading. In a strong efficient market, there is no way to help investors obtain excess profits.

At present, even a weakly efficient market is considered by most people to not exist, because the reality is that none of the conditions in the assumption can be met. Nevertheless, it can be used to aid academic research, such as what happens to assets if the efficient market assumptions are met, to assist in the analysis of real assets.

Therefore, on its basis, a series of theories such as Modern Portfolio Theory (MPT), Capital Asset Pricing Theory (CAPM), Arbitrage Pricing Theory (APT), and Option Pricing Theory (OPT) have also been developed.

#Behavioral Finance

The Efficient Market Hypothesis has been applied to some asset pricing theories, but because the conditions of the Efficient Market Hypothesis are not met, these theories predict asset prices and market behavior, but sometimes they are far from reality.

Behavioral finance is a relatively new theory, which attempts to effectively integrate finance, psychology, behavior, sociology and other disciplines, and explains a large number of “anomalies”. Behavioral finance uses a lot of psychological knowledge to describe the irrationality of the market. This irrationality sometimes even causes asset prices to skyrocket to bubbles, or plummet to chicken feathers. It can be said that other psychology-based theories are extensions of behavioral finance.

#Greater Fool Theory

Bo stupid theory, also known as “the biggest fool theory”. Simply put, when a person buys an asset, it is not that the asset itself can generate income, but that another fool will buy it at a higher price. And the idiot who took the offer may be a real idiot, or it may be another person looking for the next offer.

In the financial markets, sometimes you see an asset price being hyped to an absurd level, and it’s not that those traders are all fools, but that they are participating in a game of fools, thinking that they will not be the last fools.

The harm of the Bosha game to the market is obvious. Take the stock market as an example. The stock market was originally used for the financing and development of listed companies, but the Bosha game pushed up the asset bubble and turned the market into a casino. This is not conducive to the rational allocation of funds to resources. In more serious cases, it will even hurt The health of financial markets.

#Theory Of Reflexivity

Based on psychology, some people have also put forward new insights into the financial market, such as the reflexive theory, which is famous all over the world because of the praise of the legendary investor Soros.

Soros used this theory to explain that people’s emotions will affect changes in asset prices, and changes in asset prices will in turn affect people’s emotions. This is a model of mutual variables. Sometimes, this model in which reality and psychology are variables of each other will form a positive feedback. For example, when bad news comes out, people are afraid that the stock market will plummet and sell stocks, and the behavior of selling stocks in large quantities, in turn, will actually cause the stock market to plummet. This confirms to people that “look, the stock market will really plummet”, And the more panicked selling of stocks caused the stock market to plummet even more, and vice versa when the stock market rose. Soros used self-strengthening to describe this phenomenon.

Today, most investors recognize one thing: changes in market asset prices are largely influenced by human emotions in the short term. Therefore, sentiment indicators are also used as key reference indicators by many investors and institutions.

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