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Q: What is the caveat for emipirical research? What does the data snooping bias say?

A caveat is a warning, limitation, or consideration that researchers should be aware of when interpreting results. Data Snooping Bias: Because of estimation error and given enough characteristics, it will always be possible to find some characteristic that by pure chance happens to be correlated with the estimation error of average returns.

7 important questions on Topic / section

What does the alpha of a stock represent?

The difference between the expected return and its required return.
alpha= E[Rmkt]- CAPM

What is relative wealth concerns for investors decisions of their portfolios?

Investors care more about the performance of their portfolios relative to their peers and match the portfolios of their colleagues and neighbors (“keeping up with the
Joneses”).

What is herd behaviour? What are informational cascade effects?

Investors make similar trading errors because they are actively trying to follow each other’s behavior.
▪ Informational Cascade Effects: Traders ignore their own information hoping to profit from the information of others.
▪ Investors herd to avoid the risk of underperforming their peers; fund managers may face reputational risk if they stray too far from the actions of their peers.

What impact can news about take-over offers have on a stock?

If you can predict whether the firm would ultimately be acquired or not, you could earn profits - interpret graph

What impact does stock recommendations on e.g. A TV show have on stock prices with and without news?

Se picture

What is the caveat for emipirical research? What does the data snooping bias say?

A caveat is a warning, limitation, or consideration that researchers should be aware of when interpreting results.
Data Snooping Bias: Because of estimation error and given enough characteristics, it will always be possible to find some characteristic that by pure chance happens to be correlated with the estimation error of average returns.

What is a possibility of a positive alpha to exist in a market in regards to entry barrier and why?

If some barrier to entry restricts competition, a positive alpha can exist as there are fewer investors to compete. However, the existence of the strategies has been known for more than 15 years and implementation costs are low meaning it should drive alpha to zero.

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PPT slides - flashcards

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