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In: Finance

What are the short-term and the long-term behavior patterns of stock prices as shown in empirical...

What are the short-term and the long-term behavior patterns of stock prices as shown in empirical studies? Discuss briefly

Solutions

Expert Solution

The empirical studies shows the behavior patterns of stock prices on short-term (intraday, daily and weekly price movements) and long-term (annual and five-year returns) price movements.

Short ter price patterns

  • Serial Correlation : It measures the relationship between price changes in consecutive time periods, whether hourly, daily or weekly. It also measures of how much the behaviour of prices in any period depends upon the behaviour of prices over the previous time period. If the value of serial correlation is zero, there is no correlation between the price changes of consecutive periods. If the correlation is positive, the price changes are correlated. if correlation is negative, it is the symptom of price reversals, ie positive returns will follow negative returns.
  • Runs Test : Rus is the sequences of price increases or decreases. The Runs test is based upon a count of the number of runs in price changes over a period of time. By analysing the stock history, an investor can identify whether the runs happens more frequently or less frequently than they should. The actual number of runs is compared against the number that is expected in a series of this length. Here the price changes are assumed to be random. If the actual number of runs is greater than the expected number, there is negative correlation in price changes. If the actual number of runs is lesser than the expected number, there is negative correlation.

Long term Price patterns

In this price pattern, the price movements over longer periods (six months to five-year) in recent years are shown. When long term is taken as months rather than years, there is a tendency for a positive serial correlation between the price changes.

Seasonal Patterns

The seasonal in stock prices seems to be cut across all types of asset markets. The stock prices seem to fall on Mondays than on any other day of the week. In the case of price changes in an year, it is better in January than in any other month of the year. Such behaviour is called as January Effect and Weekend effect etc

Volume Patterns

The volume of trade is a part of publicly available information in the market. There is evidence that the volume of trade in the market carries information about future stock price changes. The changes in the prices that is accompanied by strong volume is more likely to continue in future also. The level of volume, changes in the trading volume etc provides information to the investors to take investment decisions.


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