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UNIVERSITY OF ESSEX

GRADUATE EXAMINATION 2010

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BEHAVIOURAL FINANCE

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Time allowed: 2hours

The paper consists ofFIVE questions.

Candidates must answerTWO questions, ONE from EACH section.

All questions carry equal weight.

Candidates are permitted to bring into the examination room:

Calculators (hand held, containing no textual information)

Please do not leave your seat unless you are given permission by an Invigilator.

Do not communicate in any way with any other candidate in the examination room.

Do not open the question paper until told to do so.

All answers must be written in the answer book(s) provided.

All rough work must be written in the answer book(s) provided. A line should be drawn through any

rough work to indicate to the examiner that it is not part of the work to be marked.

At the end of the examination, remain seated until your answer book(s) have been collected and you

have been told you may leave.

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SECTION A

Answer ONE question

QUESTION 1

Compare and contrast two competing behavioural finance models of mergers and acquisitions.

[50 MARKS]

QUESTION 2

Critically discuss the role of derivatives such as credit default swaps in the recent banking crisis.

[50 MARKS]

END OF SECTION A

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SECTION B

Answer ONE question

QUESTION 3

Critically evaluate two behavioural attempts to explain momentum in stock returns.

[50 MARKS]

QUESTION 4

Evaluate the claim that limits to arbitrage prevent rational investors from ensuring that asset prices do

not deviate from their fundamental values. Support your answer by providing at least one example ofevidence of limited arbitrage.

[50 MARKS]

QUESTION 5

Describe in detail the equilibrium model of Barberis, Huang, and Santos (2001). Does the modelprovide insight into understanding the Internet bubble phenomenon?

[50 MARKS]

(END OF EXAMINATION)