Problem
Project Topic: The global financial crisis of 2008
Project Details
The group project shall involve the analysis of a major financial market episode that largely confirms the evidence of significant mispricing of financial assets. The analysis shall cover the following aspects related to the episodes in the following manner:
A. Precipitating reasons behind the episode. Which assets were mispriced and why?
B. Amplification of misprcing, particularly:
a. What was the extent of the misallocation of household savings into the overpriced sector?
b. How did the fund managers and other financial intermediaries contribute to the mispricing
c. How did the firms cater to the misvaluation in the market through information disclosure, selective investments, and financing choices
d. How did the analysts forecast future growth in fundamentals and market prices?
C. Why did arbitrage fail to prevent the mispricing? What were the specific constraints faced by the arbitrageurs?
D. How did the mispricing disappear in the market? What were the precipitating reasons for the markets to realize their mistakes?
E. What is the extent to which different investor groups suffered in the crisis (institutions and retail)
In the analysis, you are expected to uncover the role of biases and heuristics in triggering the misvaluation, its amplification, and its propagation across different sectors of the economy. As a takeaway from the analysis, you are expected to suggest measures that prevent such mispricing and market crash from recurring in the future.