Clearing Price Economics: Trading Strategies, Self-fulfilling Prophecies and Financial Markets

Master's Thesis from the year 2013 in the subject Economics - Finance, grade: 55.0%, Cass Business School, course: Master of Science in Corporate Finance, language: English, abstract: This paper starts off by introducing the efficient market hypothesis, and then moves into the main trading strategies that are being use in equity markets. Trading strategies such as fundamental analysis and technical analysis are introduced. Efforts in behavioral finance are then presented to help explain biases that have impact on stock prices. Then, it alters the main focus of the paper towards understanding the function of clearing prices through the aid of price discovery and matching algorithms in stock exchanges. The hypothesis of having clearing prices as a function of the trading strategies being used in a market place given certain conditions is tested. The method used is a theoretical agent-based model. The paper finds preliminary signs of self-fulfilling prophecy as a phenomenon that seems to prevail in equity markets. Finally, it gives recommendations accordingly regarding new areas of research in financial markets.