Capital Asset Pricing Model (CAPM) gives a simple and elegant method of describing how the investors price assets in a rational world. It however fails to incorporate the human element. The first paper, “Asset Pricing and Contingent States”, by Ellouz Siwar, studies the human behavior through prospect theory, and shows that prospect theory violates several principles of expected utility. The author also develops a model of investor behavior in the evaluation of financial asset return and stock portfolios for 527 firms listed in the French market for the period July 1974 to March 2004, and finds that it has better explanatory power than the traditional CAPM. This is especially true for portfolios of small and medium size firms. The model also provides a way to test some hypotheses of the prospect theory. The second article, “Investment Choice of Occupants of Financial Services Industry: A Demographic Study”, by Manish Sitlani, Geeta Sharma and Bhoomi Sitlani, explores the association between demographic variables of gender, age, marital status, nature of occupation and household income, on investment choices. It also explores the association between qualification of participants in the financial services industry and investment choices. Investment choices are classified into five categories: Equity and Derivatives, Mutual Fund and Insurance, Fixed Return Investments, Real Estate, and Gold and Bullion. While the study finds no association between the demographic factors and investment choices, it finds a significant association between qualification and investment choices.

Initial Public Offering (IPO) is one among the available sources of financing. Equity issues as a subset of financing have got their own importance among academic community. A firm can choose to go public either through an IPO or mergers and acquisitions, in which the firm will sell itself to an existing listed firm. Firms with higher growth rate that face capital constraints will go for equity issue. The third article, “Initial Public Offering:

A Critical Review of Literature”, by Ragupathy M B, looks at the gamut of literature related to IPO, and covers issues related to ownership and control which need to be sorted before going for IPO—selection of intermediaries, involvement of venture capitalists, pricing and problems related to asymmetric information and impact of external factors on the success of the issue. The author concludes by providing a framework for successful IPO.

Volatility forecasting is an important area of research in financial markets, and immense effort has been expended in improving volatility models, since better forecasts translate themselves into better pricing of options and better risk management. The last article, “Modeling and Forecasting the Stock Market Volatility of S&P 500 Index Using GARCH Models”, by P Srinivasan, examines the superiority of symmetric GARCH model as against the asymmetric GARCH model. The models are evaluated based on out of sample forecasts, Theil-U statistic, and the usual evaluation criteria of Mean Absolute Error. The study models S&P 500 returns which are computed using daily data covering a period from January 1, 1996 to January 29, 2010. The study finds that symmetric GARCH models are superior in forecasting the conditional variance series, as compared to the asymmetric models, despite the presence of leverage effect.

-- Nikhil Rastogi
Consulting Editor