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Lecture Financial institutions, instruments and markets (6/e): Chapter 7 - Christopher Viney

Chapter 7 - Forecasting share price movements. In this chapter, the learning objectives are: Evaluate and apply bottom-up and top-down approaches to fundamental analysis, describe and apply technical analysis techniques, examine the role of program trading, explain the theoretical concepts and implications of the random walk and efficient market hypotheses when forecasting share price movements. | Chapter 7 Forecasting Share Price Movements 7- Learning Objectives Evaluate and apply bottom-up and top-down approaches to fundamental analysis Describe and apply technical analysis techniques Examine the role of program trading Explain the theoretical concepts and implications of the random walk and efficient market hypotheses when forecasting share price movements 7- Chapter Organisation 7.1 Fundamental Analysis: Top-down Approach 7.2 Fundamental Analysis: Bottom-up Approach 7.3 Technical Analysis 7.4 Program Trading 7.5 Random Walk and Efficient Market Hypotheses 7.6 Summary 7- 7.1 Fundamental Analysis: Top-down Approach Share price is determined by supply and demand of a company’s shares Expectation of bad company performance causes investors to sell their shares, increasing supply and reducing the price Expectation of good company performance increases demand and leads to an increase in share price 7- 7.1 Fundamental Analysis: Top-down Approach (cont.) What causes | Chapter 7 Forecasting Share Price Movements 7- Learning Objectives Evaluate and apply bottom-up and top-down approaches to fundamental analysis Describe and apply technical analysis techniques Examine the role of program trading Explain the theoretical concepts and implications of the random walk and efficient market hypotheses when forecasting share price movements 7- Chapter Organisation 7.1 Fundamental Analysis: Top-down Approach 7.2 Fundamental Analysis: Bottom-up Approach 7.3 Technical Analysis 7.4 Program Trading 7.5 Random Walk and Efficient Market Hypotheses 7.6 Summary 7- 7.1 Fundamental Analysis: Top-down Approach Share price is determined by supply and demand of a company’s shares Expectation of bad company performance causes investors to sell their shares, increasing supply and reducing the price Expectation of good company performance increases demand and leads to an increase in share price 7- 7.1 Fundamental Analysis: Top-down Approach (cont.) What causes the shifts in demand and supply of a company’s securities on the secondary market? Three approaches to answering this question 1. Fundamental analysis: top-down 2. Fundamental analysis: bottom-up 3. Technical analysis 7- 7.1 Fundamental Analysis: Top-down Approach (cont.) Fundamental analysis Considers macro and micro factors that impact upon cash flows and future share prices of various industry sectors and firms Macro factors include interest rates, economic growth, business investment Micro factors are firm-specific and relate to management’s impact on company performance 7- 7.1 Fundamental Analysis: Top-down Approach (cont.) Top-down approach considers macro factors Economic growth of international economies Exchange rates Interest rates Domestic economy Growth rate Balance of payments Inflation Wage and productivity growth Government responses to changes in the above factors 7- Top-down approach—international economies The higher the growth rate in the rest of the .