3. Stock image levels and factors

 

After looking at the economic value of a stock, now it is time to salt
and pepper
it with the behavioral elements.

This is the role of the image coefficient

  What are the average and extreme
     stock image levels?

Image coefficients may range between 0.2 to 3
(if we prune exceptional cases!).

The average historical image for the whole market

(taking a largely diversified stock index as a reference) is 1.

The image bracket is specific to each stock:

It is more or less broad and high according to the type of stocks

stocks and to the market climate variations.

See the image tables directly if you want to skip the
explanations below.

  What factors act upon the image levels?

We can split the image in two components:

Technical market factors (i.e. market liquidity aspects),

Above all, individual and collective behavioral biases

Cognitive biases : attention anomalies, anchoring...

Even more crucial, individual sentiments, and collective
   market mood, when they are biased
(fear, greed, herd
   instinct ...to quote
only a few phobias, phantasms and
   psychosomatic rashes).

These operators' attitudes and sentiments, and the resulting
behaviors, are quite diverse, changing
and they differ from
one stock to another.

Thus, specific pages in the site and a discussion group / list
are dedicated to these
behavioral finance topics

  Are there relations with
    classical finance theory factors?

We lack room here also to develop the Finance Theory's
famous duettists:

"Risk premium", an extra return to cover risk aversion,

"Beta coefficient", a parameter based on the stock
     return's
volatility,and by extension, its price volatility,

in itself a form of risk, and on its correlation to the
general market volatility.

If a stock has a beta (called also "elasticity") of 1.2, its
price is supposed to fall or rise by 12% if the market rises
or falls by 10%

For specialists:
is there some relation between the image and the
beta coefficient
? Click on the link.

These tools are directly linked to the good old concepts of

'utility / risk aversion / risk/ rewards optimization".

The problem is that, as behavioral finance shows, these so
called rational concepts suffer
"cognitive" and "affective"
distortions and variations.

Thus they are far from being the only engine of market
behavior.

Therefore I imagined a concept that seems to me, even it
may look immodest,
more exhaustive and more descriptive
of market realities: the image coefficient.

This leads to a valuation model in which I include:

In the interest rates used to compute the primary PER: a
     portion
of the risk premium (portion I call the "structural
    systematic premium"
).

It is a constant, common to all stocks.

It measures the whole stock market's average historical
risk aversion.

In the image, as a factor among others:
    the remaining
portion of the risk premium.

This part 1) changes with time and 2) differs from one
stock to the other.

As for the beta coefficient, it intervenes indirectly in the width
of the image coefficient brackets.

separ

 This page last update: 02/08/15   
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