True Price Value by Daryl Guppy and Chen Jing
What is more important in determining market behavior and
market pricing, fair value based on fundamentals or the
market value created by psychological trading behavior?
The classic economic and market models rest on
fair value and describe pricing activity in the
market as subject to “irrational exuberance.” An
analysis of the China and Hong Kong markets with a parallel listing of China-based companies suggest that
psychological trading behavior has a much greater role to
play in correct market pricing. The study suggests that the
market price is the rational and valid price and acknowledges
an emotional component in pricing. This confirms the role
that technical analysis plays in understanding market behavior
and making sound trading and investment decisions.
The variety and difference in trend behavior in these parallel
listed stocks challenge many assumptions about the relationship
between price, value, fair pricing, and the extent of the role
of emotional behavior in setting enduring price relationships.
FUNDAMENTAL OR TECHNICAL?
Many traders believe financial markets are a fabrication
where the price of a traded stock is driven primarily by the
emotions and behavior of participants. These traders make
profits by understanding the psychology of the market and
using charting and technical analysis methods to identify
points of trend change or trend continuation.
In comparison, many investors believe the market is about
fundamental value based on the real business and performance
of the company. When the traded price moves above
or below this true value, the investors lament the distortions
introduced by market emotions and overreactions. They view the market as rational or irrational, forgetting that even the
most excited person believes he is making a rational decision
to buy. Their investment technique often rests on locating
companies trading below their true value on the assumption
that the market price will eventually lift to match and reflect
the true value.