Historically considered, fundamental and technical analyses have always competed, often leading to advocates that ideologically judge either a fundamental analysis or technical analysis to be the one and only analyzing concept. Behavioral finance is a relatively new scientific approach to explain psychological anomalies on the stock market, but is also more and more often considered to be able to compete with both fundamental and technical analyses. Still, do these analysis concepts really compete in practice or could they actually supplement each other with their respective strengths?
Taking the turbulent stock market phases as well as these unanswered questions about fundamental analysis, behavioral finance and the technical analysis into consideration, this thesis ultimately pursues two general objectives:
Firstly, fundamental analysis, behavioral finance and technical analysis should be scientifically examined in terms of their premises, analysis approaches, empirical evidences as well as strengths and weaknesses.
Secondly, it should be examined as to whether the fundamental analysis, behavioral finance and technical analysis have theoretical and practical synthesis capabilities that could be used for developing a synthesis concept. The synthesis concept should combine the respective strengths and eliminate the respective weaknesses of each of the three analysis concepts.
Fundamental analysis, behavioral finance and technical analysis are examined in detail. Empirical studies should prove if, and by which approaches, the analysis concept is able to predict future
stock prices.
In order to be able to develop a synthesis concept, each analysis concept is evaluated by a SWOT analysis, pursuing the objective of determining the respective strengths, weaknesses, opportunities and threats of the analysis concept being considered. Based on the previous SWOT analyses, the sixth chapter examines the synthesis capabilities of the fundamental analysis, behavioral finance and technical analysis.
In a first step, the synthesis capabilities are theoretically analyzed. Based on the theoretical consideration the synthesis capabilities are also practically examined in a second step. A broad empirical study using the example of the DAX performance index analyzes the predictive capabilities of the three analysis concepts. By evaluating the theoretical as well as the practical synthesis capabilities, a general conclusion is drawn about the
synthesis capabilities.
Table of Contents
1. Introduction
2. Information Efficiency on the Stock Market
2.1. Efficient Market Hypothesis
2.1.1. Definition and Theoretical Assumptions
2.1.2. Efficiency Forms
2.1.3. Classification of Fundamental Analysis, Behavioral Finance and Technical Analysis
2.2. Empirical Studies
2.3 Preliminary Conclusion
3. Fundamental Analysis
3.1. Definition and Premises
3.2. Company Evaluation Methods
3.2.1. Separate Evaluation Methods
3.2.2. Overall Evaluation Methods
3.2.2.1. Present Value Methods
3.2.2.1.1. Capitalized Earnings Value Approaches
3.2.2.1.2. Discounted Cash Flow Approaches
3.2.2.2. Market Multiples
3.2.2.3. Real Options
3.3. Empirical Studies
3.4. SWOT Analysis
3.5. Preliminary Conclusion
4. Behavioral Finance
4.1. Definition and Premises
4.2. Anomalies
4.2.1. Anomalies Concerning the Investors Behavior
4.2.1.1. Information Perception
4.2.1.2. Information Treatment
4.2.1.3. Decision Making
4.2.2. Stock Market Anomalies
4.3. Sentiment Indicators
4.4. Empirical Studies
4.5. SWOT Analysis
4.5. Preliminary Conclusion
5. Technical Analysis
5.1. Definition and Premises
5.2. Analysis Methods
5.2.1. Chart Analysis
5.2.1.1. Basic Concepts
5.2.1.2. Formation Analysis
5.2.2. Indicator Analysis
5.2.2.1. Trend-Following Indicators
5.2.2.2. Oscillators
5.3. Empirical Studies
5.4. SWOT Analysis
5.5. Preliminary Conclusion
6. Synthesis Capabilities of Fundamental Analysis, Behavioral Finance and Technical Analysis
6.1. Objective and Procedure
6.2. Theoretical Synthesis Capabilities
6.3. Practical synthesis capabilities using the example of the DAX Performance Index
6.3.1. Practical Application of Fundamental Analysis, Behavioral Finance and Technical Analysis
6.3.1.1. Intrinsic Value
6.3.1.2. Sentiment Indicators
6.3.1.3. Technical Indicators
6.3.2. Practical Synthesis Capabilities
6.4. Preliminary Conclusion
7. Final Conclusion and Outlook
Research Objectives and Themes
This thesis examines the three primary stock market analysis concepts—fundamental analysis, behavioral finance, and technical analysis—to determine their individual efficacy and potential for a theoretical and practical synthesis. The research aims to understand whether these methodologies can complement each other by leveraging their respective strengths to mitigate individual weaknesses, particularly in predicting market movements and timing investments.
- Scientific examination of the premises, approaches, and empirical evidence for fundamental, behavioral, and technical analysis.
- Evaluation of each concept using SWOT analysis to identify specific strengths, weaknesses, opportunities, and threats.
- Theoretical development of a synthesis concept to combine the identified strengths of all three approaches.
- Practical empirical study using the DAX Performance Index to test the synthesis capabilities of these methods.
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3.1. Definition and Premises
The term “fundamental analysis” is widely used in capital market analysis and therefore describes a wide range of fundamentally-driven analysis concepts (Cesar 1996). In the following, the term “fundamental analysis” encompasses the most important fundamentally-driven analysis concepts for determining the value of a company – expressed by the price of its stocks (Gantenbein and Spremann 2005). Fundamental analysis is based on the premise that the actual stock market price fluctuates around its intrinsic value over time (Brigham and Houston 1998).
The intrinsic value is defined as the fair value of a company’s stock. It is determined by analyzing which and to which extent fundamental factors have an influence on a company’s value (Beike and Schlütz 2005, Mattern 2005). Finally, fundamentally-driven concepts – no matter which concept is considered – all have the same objective: comparing the calculated intrinsic value with the actual stock market price to be able to draw a conclusion, if the analyzed stock is undervalued or overvalued (Brigham and Houston 1998).
On the one hand, a stock is assumed to be undervalued if the intrinsic value lies under the actual stock market price (McLeavy and Solnik 2003). On the other hand, a stock is respectively assumed to be overvalued if the actual stock market price exceeds the intrinsic value of the stock (McLeavy and Solnik 2003).
The concept of intrinsic value implies that market participants are assumed to be rational in terms of buying a company’s stock, because of the fundamental value of that company (Mattern 2005).
Summary of Chapters
1. Introduction: Outlines the recent stock market turbulence and establishes the thesis objective to scientifically examine three core analysis concepts and their potential for synthesis.
2. Information Efficiency on the Stock Market: Discusses the Efficient Market Hypothesis (EMH) as the theoretical foundation for market pricing and analyzes empirical studies regarding information efficiency forms.
3. Fundamental Analysis: Defines fundamental analysis and its premise of intrinsic value, evaluating various company evaluation methods like DCF and Market Multiples through a SWOT analysis.
4. Behavioral Finance: Explores irrational investor behavior, categorizing psychological anomalies during the investment process and explaining their impact on stock market phenomena.
5. Technical Analysis: Examines chart and indicator analysis based on the premise that historical price data and market trends can forecast future movements.
6. Synthesis Capabilities of Fundamental Analysis, Behavioral Finance and Technical Analysis: Provides a theoretical and empirical investigation into combining the three approaches, using the DAX Performance Index as a case study.
7. Final Conclusion and Outlook: Summarizes the thesis findings, confirming that the three methods can supplement each other to improve investment decision-making despite lingering market efficiency challenges.
Keywords
Fundamental Analysis, Behavioral Finance, Technical Analysis, Efficient Market Hypothesis, Intrinsic Value, Sentiment Indicators, Market Anomalies, Stock Market Prediction, DAX Performance Index, Discounted Cash Flow, Investment Strategy, Market Efficiency, Investor Behavior, SWOT Analysis, Synthesis Concept
Frequently Asked Questions
What is the core focus of this thesis?
The thesis focuses on three distinct methods of stock market analysis: fundamental analysis, behavioral finance, and technical analysis, exploring their theoretical premises and practical applications.
What are the central thematic fields covered?
The work covers market information efficiency, the valuation of companies based on fundamental factors, the psychological aspects of irrational investor behavior, and the use of technical indicators for trend forecasting.
What is the primary objective of the research?
The main goal is to determine if these three competing analysis concepts can be synthesized into a more robust framework that eliminates individual weaknesses and enhances predictive capabilities.
Which scientific methods are employed?
The author uses theoretical literature reviews, SWOT analyses for each concept, and a quantitative empirical study based on analyst recommendations and the DAX Performance Index.
What is addressed in the main body of the work?
The main body details each of the three analysis concepts individually, followed by a dedicated chapter that tests their combined practical application using historical DAX data from 2004 to 2008.
Which keywords best characterize this work?
Fundamental analysis, behavioral finance, technical analysis, intrinsic value, market anomalies, and the synthesis of financial forecasting methods.
How is the "intrinsic value" of a stock calculated in this study?
The study uses the average target price derived from a large dataset of equity analyst recommendations to approximate the intrinsic value, allowing for a comparison against actual market prices.
Why is the sentiment index relevant to the thesis?
Sentiment indicators are highlighted as a bridge between behavioral finance and technical analysis, helping to quantify irrational market moods and identify potential reversals or exhaustion points.
- Quote paper
- Timo Schlichting (Author), 2008, Fundamental Analysis, Behavioral Finance and Technical Analysis on the Stock Market, Munich, GRIN Verlag, https://www.grin.com/document/132302
