If Eve is wrong, then You are wrong too!

Hi! Indeed, I am too lazy to do my job recently. Article Papers lah, Global Finance grant lah, PhD Club lah, Tutorial lah, My website maintainance lah (thanks to refi to help me on this freaking problem) Badminton lah, and my sleeping competition with pak Ajo and Simon… 😛 But somehow, I am… still lazy… what a troublesome. Anyway, I just started my what-so-called as “holy life”; and I found something interesting. It is about Eve.

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Intention in Using Internet Stock Trading

Intention in Using Internet Stock Trading

By: Rayenda Brahmana

After Ajzen and Fishben formulated the Theory of Reasoned Action (TRA) in 1980, much research explores the intention attitude of human being. Ajzen and Fishbein formulated the TRA after trying to estimate the discrepancy between attitude and behavior. This TRA was related to voluntary behavior. Later on behavior appeared not to be 100% voluntary and under control, this resulted in the addition of perceived behavioral control. With this addition the theory was called the theory of planned behavior (TPB). The theory of planned behavior is a theory which predicts deliberate behavior, because behavior can be deliberative and planned1.
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Preferences, Choices, and Expected Utility Theorem

The main assumption in Economics (and also Finance) is the expected utility. In academic world, by using this assumption, economics is more known as conventional economic.  In a very simple way, this assumption states that human behaviour reflects rational self-interest. Individuals look for and pursue opportunities to increase their pleasure, happiness, or satisfaction obtained from consuming a good or service in rational way (McConnell, 2009).
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Definition of Irrational Exuberance

This note was taken (copy and paste) from http://www.irrationalexuberance.com/definition.htm

It’s written by Robert J Shiller. I am reading his book (Irrational Exuberance) now.  It is a very good book. It also helped my PhD thesis. I just knew this book from my phd friend who will have his Viva next month, namely Gary rangel.

Briefly, I can say this book is good. I will resume the book and post it here. Just wait for it.


Rayenda Brahmana

Origin of the Term

The term “irrational exuberance” derives from some words that Alan Greenspan, chairman of the Federal Reserve Board in Washington, used in a black-tie dinner speech entitled ” The Challenge of Central Banking in a Democratic Society” before the American Enterprise Institute at the Washington Hilton Hotel December 5, 1996. Fourteen pages into this long speech, which was televised live on C-SPAN, he posed a rhetorical question: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” He added that “We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs and price stability.”

Immediately after he said this, the stock market in Tokyo, which was open as he gave this speech, fell sharply, and closed down 3%. Hong Kong fell 3%. Then markets in Frankfurt and London fell 4%. The stock market in the US fell 2% at the open of trade. The strong reaction of the markets to Greenspan’s seemingly harmless question was widely noted, and made the term irrational exuberance famous. It would seem to make no sense for markets to react all over the world to a question casually thrown out in the middle of a dinner speech.

Greenspan probably learned once more from this experience how carefully someone in his position has to choose words. As far as I can determine, Greenspan apparently never actively used the words “irrational exuberance” again in any public venue. The stock market drops around the world that occurred after his speech on December 6, 1996 have all been forgotten, eclipsed by bigger subsequent events, but it was those stock market drops that focused public attention on the phrase irrational exuberance and which caused it to enter our language.

The term irrational exuberance became Greenspan’s most famous quote, out of all the millions of words he has uttered publicly. The term “irrational exuberance” is now often used to describe a heightened state of speculative fervor. It is less strong than other colorful terms such as “speculative mania” or “speculative orgy” which discredit themselves as overstating the case. I chose this phrase as the title for my book because many people know instantly from this title what this book is about. Often people ask me whether I coined the term irrational exuberance, since I (along with my colleague John Campbell and a number of others) testified before Greenspan and the Federal Reserve Board only two days earlier, on December 3, 1996, and I had lunch with Greenspan on that day. I did testify that markets were irrational. But, I feel sure that I am not the origin of the words irrational exuberance.

Actually, Greenspan is quoted in a Fortune Magazine article in March 1959, long before he became Federal Reserve chairman, about “over-exuberance” of the financial community. These are similar words. It appears that “irrational exuberance” are Greenspan’s own words, and not a speech writer’s.

In his 2007 autobiography, The Age of Turbulence: Adventures in a New World Greenspan said “The concept of irrational exuberance came to me in the bathtub one morning as I was writing a speech.” (p. 176.) A computer search finds that the phrase “irrational exuberance” had virtually never been used before Alan Greenspan. It has been pointed out to me that the words “irrational exuberance” were used in a 1989 novel A Trap for Fools by Amanda Cross, E. P. Dutton, NY, Chapter 8, p. 99, “. . . she didn’t just tumble out of that window in a moment of irrational exuberance,” but this was a very rare exception. But, the term did not spring full-born from the soul of Alan Greenspan either, for there were already common uses of the words individually to refer to speculative market excess. As early as 1931, Frederick Louis Allen, in his best seller Only Yesterday: An Informal History of the 1920s described “the profound psychological reaction from the exuberance of 1929.” (p. 285).

Two years before Greenspan’s speech, an editorial in Business Marketing by Rance Craine contained the paragraph “The stock market has been behaving in a seemingly irrational way most of the year. Every time the Commerce Department puts out fresh data showing that the economy continues to strengthen, the stock market goes down in a dramatic fashion. And when retail or car sales go down, or factory orders slow from the previous month, the stock market can hardly contain its exuberance.” I believe that there is nothing essentially catchy about the phrase “Irrational Exuberance,” but it lives on because the initial 1996 story of a stock market crash by nothing more than the utterance of those words led to a general interest in the phrase. The phrase survives in our language as more than a relic of one minor stock market episode because it has acquired a meaning that refers to the mindset that occurs during speculative bubbles like that of the 1990s.

Robert J. Shiller


Market Efficiency in Brief

Market Efficiency in Brief

Rayenda Brahmana

My MSc dissertation is about Market Efficiency. It discussed the level of weak form market efficiency in South East Asia (Singapore, Malaysia, Indonesia, and Thailand). The purpose is to examine which stock market has better form in term of weak level of efficiency. I conducted R/S analysis, ACF, Probability Distribution, and GARCH (1,1) as the statistical tools to investigate the weak form efficiency. Market Efficiency is an old topic but still discussed ‘til today.

Ironically, some lecturers (not in USM or UoB) argue this topic should not be discussed further. They also argue market efficiency is not an interesting topic to discuss. They prohibit their supervisee researching about market efficiency which is a very idiotic way in learning process. If they prohibit investigating further about market efficiency, why don’t they stop discussing about capitalism or accounting?

Several students ask me about market efficiency and I just knew their lecturer do not teach them about market efficiency and just skip that section because the lecturers think market efficiency is out-of-date topic.

The latter, I will not debate about the importance of market efficiency issue in finance. I prefer to give a brief of market efficiency for those students. Hopefully, my short explanation can inspire them to dig further about market efficiency.

In 1900, Bachelier surprised finance world with his Ph.D thesis. He found Brownian motion in share prices, implying that share prices move randomly and does not follow systematic pattern. Then, in 1933, Cowels did the same research and found the same result that supported Bachlier’s work.

After the Brownian motion in stock trading found in the early 19th century, finance as a science converges to investigate the caused. Several scholars ended their conclusion that the caused of the Brownian motion in stock is market efficiency. This market efficiency usually measured by the speediness of stock reaction to newly information.

Further, Kendall and Hill (1953) attempted to study share prices behavior changes. Kendall found that knowledge of historical price changes yield none of information about future price changes and in speculative markets, history does not repeat itself.

Working (1934) and Alexander (1961) findings were consistent to Kendall works. Working (1934) argued that a series obtained by cumulating random numbers will for brevity and simplicity be called usually a random-differences series, since it is the first difference of the series an not the series itself, which are random number.

Alexander (1961) quoting the study of Kendall (1953) and Osborne (1959) stated that in an efficient speculative market, the price movements are random. Further, Guru of fractal analysis in finance, Benoit Mandelbrot, in 1966 presented the Martingale Model, implying that price series may not be random but its unbiased property does not allow the traders to exploit price dependences to secure super normal movements. Then, Smidt (1968), LeRoy (1989), and Roll (1994) observed the random walk hypothesis by using the Martingale Model and found it is remarkably hard to make profit even from the most extreme violations of stock market efficiency.

Cootner (1962) inferred that price movements in speculative markets are random and the returns tend to be significantly leptokurtic. Then Fama (1966) in his discussion paper stated that the returns are more skewed and the kurtosis. Stevensson and Bear (1970) also found the leptokurtic distribution of Soya Beans and Corns of CME.

Evans findings (1968), which conducted price movement study of 470 securities listed in S&P index of 1958-1967, state there is irrespective of the randomness or form characterizing the empirical distribution of security price changes. Further he found that although some degree of non-randomness exists in the distribution of security price changes, it is not of a magnitude that should be considered meaningful to investor dealing with portfolio of securities.

The peak of random walk booming was occurred when Fama in 1970 stated the efficient market hypothesis and classified the informational efficiency in three categories: weak form efficiency, semi-strong efficiency, and strong efficiency.

Eugene Fama in 1970, broke down the EMH into three forms, which are:

Weak Form Efficiency

The Information set considered includes only past information. The characteristics of this form are:

<!–[if !supportLists]–>a. <!–[endif]–>No excess returns can be earned by using the investment strategies based on historical share prices or other financial data

<!–[if !supportLists]–>b.<!–[endif]–>Technical Analysis will not be able to consistently produce excess returns

<!–[if !supportLists]–>c. <!–[endif]–>Fundamental analysis can be used to identify undervalue stocks and overvalue stocks.

Semi-strong Efficiency

The information set considered includes all publicly available information. The characteristics of this form are:

a. There will no excess return can be earned from publicly information

b. Fundamental Analysis techniques will not be able to reliably produce excess returns

c. All investor has the same interpretation of publicly information.

Strong Efficiency

The information set includes all information, whether publicly available or not. The characteristics are:

  1. Share prices reflect all information and no one can earn excess returns
  2. Strong efficiency market will be impossible if there are legal barriers to private information becoming public
  3. Investors can not consistently earn excess returns over a long period.

This market efficiency topic has very long debates until today. Many researchers debate the market efficiency theory and give the contrary results which are:

  1. Post Earning Announcement (Ball and Brown, 1968)
  2. Market Microstructure (Bagerhot, 1971)
  3. Growth Vs Value (Basu, 1977)
  4. Excessive Volatility and Volume (Shiller, 1981)
  5. Small Firm Effect (Banz, 1981)
  6. Long Term Price Reversal (DeBondt and Thaler, 1985)
  7. Equity Risk Premium ( Mehra and Prescott, 1985)
  8. Market Puzzle (Ritter,1991)
  9. Momentum Anomalies (Jegadeesh and Titman, 1993)
  10. Accrual Economy (Sloan,1996)
  11. Home Bias Puzzle (Hubermann, 2001)

In modern theory, an efficient market is not only created by the adjustment acceleration to the new information but also how the market fully reflected of all available information (Fama, 1991). A more rigorous definition is a market is said to be efficient with respect to particular information set, if it is not possible to generate excess return on the basis of trading on the information.

Thus, market efficiency topic is still an interesting topic to discuss. The psychology effect (behavioral finance) in traders’ decision making is also market efficiency topic (Kahneman and Tversk, 1979; Lo and Repin, 2001; Barbaris, Huang, and Thaler, 2006).

As the conclusion, even though market efficiency has started in the beginning of 20th century, it is an interesting to investigate it further; mainly, in this current financial crisis. Happy researching!

Risk Measurement

Risk Measurement

Rayenda Brahmana

As Requested to make the bachelor degree’s lecture material

The fact is my PhD topic is not about risk management, it is about valuation. I have been called to make a brief about risk measurement. Fyi, I do not have any experience in teaching or lecturing. I do not know where and how to start, especially, when they gave me a very specific topic about risk measurement. At least, I remember what my teacher in high school told me, “A Loser says: It looks easy, but it is impossible. A winner says: it looks difficult, but it still possible.”. So, I just tried my best and sketched the taught that passed by in my head. Then, I made mind mapping, and I want to describe and write my mind mapping. This is the result……….

Theoretically, risk can be defined as a model about the precise of probability. It is about the possibility of suffering loss. It means Risk concept, statistically, is a model of dispersion. Dispersion, itself, can be defined as variability in a probability distribution. The measurements of dispersion are (i) Standard Deviation, (ii) Interquartile range, (iii) Range, (iv) Mean difference, (v) Median Absolute Deviation, (vi) Average absolute deviation, (vii) Covariance, etc

In finance, everything about risk is must be closely related to volatility. Before you learn what volatility is, you have to know about Normal Distribution. Because risk is defined as the possibility of suffering loss, it means there is dispersion from normal condition. Perhaps, the most important distribution which represents adequately many random processes is Normal Distribution. If the set of events disperse from the normal distribution, it can be identified as the occurrence of risk.

Dispersion model, which proxy by Standard Deviation, also can be applied in finance. To measure the risk of stock price can use volatility. The proxy of volatility is standard deviation. So, to know how much the risk of the stock that you choose is, you can just model it from the standard deviation of the stock returns. Continue reading

Fundamental Vs Technical

Fundamental Vs Technical

By: Rayenda K Brahmana

Can we use it both? Yes! Which one is the best? Hm… Is it that hard to answer that question? Actually no! So, which one is the best? Hm…

Okay. In security analysis, there are two main valuations which are Fundamental and Technical. Technical analysis is a security analysis tool to predict the direction of security prices by its volume and historical prices. Meanwhile, fundamental analysis is a security analysis that claims ability to find the fair value of the firm. The question is still the same. Which one is the best?

Okay. Before showing which one is the best, here is the history of technical and fundamental. Technical analysis has been used since 1700s. Homma Munehisa, a rice merchant from Japan, is believed as the founder of candlestick chart. Further, Charles Dow is believed as the founder of modern technical analysis. If you love security analysis, Dow Theory must be remembered by you. Another technical developer is Ralp Elliot and William Delbert Gann.

In other hand, it is very hard to find when the first fundamental analysis had been conducted. The first merger occurred after the depression of 1883. In that time The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms consolidated with similar firms to form large. Even though in that time, there are no DDM, DCF, or other models, maybe the fundamental analysis is firstly used during the Merger Movement. Thus, DDM, DCF, RIC, and other models are introduced in 20th and 21st century.

Okay. Which one is the best? Hm…Before answering that question, I will introduce you to another important finding in finance area which is known as market efficiency. In 1900, Louis Bachelier, a French mathematician, found a Brownian motion in US stock prices. Then, in 1933, Cowels did the same research and found the same result that supported Bachelier’s work. Then, in 1970, Fama introduced the Efficient Market Hypothesis and classified the informational efficiency in three categories: weak form efficiency, semi-strong efficiency, and strong efficiency. In weak form efficiency, technical analysis can not beat the market frequently. If the market moves more efficiently to semi-strong efficiency, the fundamental analysis can not beat the market frequently. Does it mean fundamental analysis outperform technical analysis? Hm… Which one is the best?

Okay. Before answering the question, I will introduce to two strategies of investing, Passive Investing and Active Investing. Passive investing is a strategy that making time limitation ongoing buying and selling action. Passive investor has an intention of long-term appreciation. It’s also known as buy-and-hold strategy. Passive strategy must require good initial research and well diversified portfolio. Their main security analysis is fundamental analysis.

In other hand, active investing can be defined as an aggressive strategy where investor continuously monitors the market in order to develop profitable condition. Active investor use technical analysis as their security analysis. Thus, some times they use multiple screening as second opinion.

The facts show that the return of passive investing is outperforming the active investing. Another fact shows that active investing can not beat the market frequently. So, which one is the best? (I will put the table as soon as I know how to upload images).

Okay. Which one is the best? Hm… Before answering the question, I want to introduce several facts. (These are real facts. I got it when I was studying in UK in Dr. Ranko Jelic Class. After I know how to manage images, figures, and charts, I will put it all here. Promise you). First, Fundamental analysis beats market more frequently than technical analysis. Second, We must know the richest man in the world Warren Buffet. If I may add Peter Lynch who also fundamental believers. But from technical analysis? Hm….Hardly finds one who can beat Warren Buffet.

So, which one is the best? Fundamental or Technical? Hm…