University of New Hampshire

University of New Hampshire Scholars' Repository

Honors Theses and Capstones Student Scholarship

Spring 2020

What Drives Prices in Financial Markets?

Sinead Brid McDonagh
University of New Hampshire, Durham

Follow this and additional works at: https://scholars.unh.edu/honors

Part of the Finance and Financial Management Commons

Recommended Citation
McDonagh, Sinead Brid, "What Drives Prices in Financial Markets?" (2020). Honors Theses and
Capstones. 536.
https://scholars.unh.edu/honors/536

This Senior Honors Thesis is brought to you for free and open access by the Student Scholarship at University of
New Hampshire Scholars' Repository. It has been accepted for inclusion in Honors Theses and Capstones by an
authorized administrator of University of New Hampshire Scholars' Repository. For more information, please
contact [email protected].
 McDonagh 1

What Drives Prices in Financial Markets?

by
Sinead McDonagh

A Thesis
Submitted to the Department of Accounting and Finance
University of New Hampshire
In Fulfillment of the Requirements
for the Peter T. Paul College Honors Program
May 2020
What Drives Prices in Financial Markets? McDonagh 2

Table of Contents

I. Introduction 3

II. The Efficient Market Hypothesis 4

III. The Behavioral Finance View 7

IV. Technical Trading 10

V. Three Potential Drivers of Market Prices 14

VI. Bloomberg Wrap Reports 15

VII. Expectations 16

VIII. Materials 17

IX. Procedure 19

X. Results 21

XI. Discussion 23

XII. Conclusions 27

XIII. Follow Up 28

XIV. Appendix 30

XV. References 34
What Drives Prices in Financial Markets? McDonagh 3

Introduction
Within financial markets, participants rely on various factors to drive their buying and

selling decisions. Many speculators in the market depend on fundamental factors, such as news

or broad economic information, to motivate their decisions. Other investors allow their personal

biases and psychological factors to influence their choices. Some prefer to study historical price

trends and patterns. Many other market participants conduct intrinsic value analysis to seek

mispricing. No matter their motivation, investor’s decisions have a monumental effect on stock

valuation and price fluctuation in the market.

The question of what drives prices in financial markets has been hotly debated amongst

financial economists for decades. It is proven that speculator’s decisions have a strong influence

on market prices, but what is the biggest driver of these decisions and the price fluctuations that

result? Are fundamental factors the most influential to investors? Can psychology sway decision-

making and valuation over time? Is technical trading prevalent enough to have a large effect on

prices? Do these conclusions prove that markets are efficient or inefficient in valuing securities?

In order to answer these questions, textual data found within Bloomberg Wrap Reports

was utilized to create a data set. These reports, released at the end of every trading day, provide

strong insight regarding market activity drivers and subsequent price fluctuations. After research

and analysis was conducted, it became apparent that there was only one strong driver of financial

market prices within the chosen seven-month timeline.

What Drives Prices in Financial Markets? McDonagh 4

The Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) is a hypothesis in financial economics stating

that prices of securities are immediately influenced by all available news and information in the

market. The explanation behind this hypothesis is that when information arises, the news is

quickly spread and incorporated into security’s prices without delay. Examples of information

include company earnings and investment strategies, as well as macroeconomic considerations,

such as overall economic activity and interest rates.

Eugene Fama, one of the pioneers of the EMH, said the following in 1970:

“An ‘efficient’ market is defined as a market where there are large numbers of rational,

profit ‘maximisers’ actively competing, with each trying to predict future market values

of individual securities, and where important current information is almost freely

available to all participants. In an efficient market, competition among the many

intelligent participants leads to a situation where, at any point in time, actual prices of

individual securities already reflect the effects of information based both on events that

have already occurred and on events which, as of now, the market expects to take place in

the future. In other words, in an efficient market at any point in time the actual price of a

security will be a good estimate of its intrinsic value.”1

According to Fama, efficient markets are markets where public news and information are

immediately incorporated into stock prices. Once this information is released to the public,

market participant’s consequent buying and selling decisions push stock prices to their

“equilibrium” level. This equilibrium is said to be a good and fair estimate of the true value of

1
Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The
Journal of Finance, 25, 383-417.
What Drives Prices in Financial Markets? McDonagh 5

the security because it “fully reflects” all available information.2 Under this hypothesis, news and

information are the biggest drivers of stock price fluctuations and they contribute to efficient

pricing of securities in the market.

Unfortunately for investors, efficient markets are said to be impossible to beat. Due to

investor’s imperfect knowledge of the future, there is no true way to predict what news will be

released in the coming days, months, or years. Furthermore, is it impossible to understand

exactly how investors will perceive the new information, so it is difficult to determine how price

levels in the market will behave as a result of said news release. Aside from instances of insider

trading, there is no legal way to act on future information because it is not yet known by the

public.

In other attempts to outperform the market and realize profits, speculators also employ

technical and fundamental analysis. Burton Malkiel, an economist and proponent of passive

investing practices, defended that neither type of analysis would allow an investor to achieve

greater returns and outperform the financial market, due to the fact that markets are so heavily

based on fundamentals.3 In 2005, Malkiel also went on to research and prove that actively

managed funds underperformed index funds by over 200 basis points in some cases, despite their

attempts to outperform the market.4 Overall, the Efficient Market Hypothesis defends the

argument that investors should be rational in their trading practices while relying on news and

2
Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The
Journal of Finance, 25, 383-417.
3
Malkiel, B. G. (2003). The Efficient Market Hypothesis and Its Critics. The Journal of
Economic Perspectives, 17, 59-82.
4
Malkiel, B. G. (2005). Reflections on the Efficient Market Hypothesis: 30 Years Later. The
Financial Review, 40, 1-9.
What Drives Prices in Financial Markets? McDonagh 6

public information because there is no way to outperform the financial market. In this case,

rational trading means that one should heavily consider fundamentals when investing because

very little else will help them to successfully make informed decisions.

All things considered, the Efficient Market Hypothesis says the following:

1. Fundamentals, information, and news are the biggest drivers of stock price fluctuations in

the financial market.

2. Markets immediately incorporate news into stock prices because investors make buying

and selling decisions in reaction to that information.

3. Financial markets are efficient in valuing securities because the informed decisions of

market participants drive prices to equilibrium.

4. Financial markets are impossible to beat because there is no way to predict future news

releases or the reaction that will result. Additionally, neither technical nor fundamental

analysis will allow an investor to outperform the market.

5. Some economists argue that passive investing strategies are the most practical due to the

strength of the Efficient Market Hypothesis.

Although the Efficient Market Hypothesis is heavily supported amongst economists, the

Behavioral Finance View is another theory that attempts to pinpoint the cause of everchanging

fluctuations of financial market price levels. Unlike the Efficient Market Hypothesis, the

Behavioral Finance View considers the role of investor psychology and emotions when making

decisions in the market.

What Drives Prices in Financial Markets? McDonagh 7

The Behavioral Finance View

The Behavioral Finance View (BFV) considers the effect of investor emotions and

psychology on their trading practices, as well as the subsequent reaction of the financial market.

Unlike the Efficient Market Hypothesis, which credits fundamentals as the sole price

driver in the efficient financial market, the Behavioral Finance View says that investors also

consider personal biases and psychological factors when making trading decisions. The

Behavioral Finance View explains that psychology and biases have just as much of an effect on

financial market price levels as fundamental factors would under the Efficient Market

Hypothesis. “The behavioral approaches suggests that other factors, such as swings in market

sentiment between optimism and pessimism, can also generate substantial market movement.”5

Decisions that consider more than fundamental factors and public information are considered

irrational. As a result of this irrationality, markets are said to be inefficient and imperfect under

the Behavioral Finance View.6

Behavioral economists argue that markets are imperfect because people often stray from

rational decisions. They believe this behavior creates market breakdowns and mispricing, since

investors are making decisions that are not based on true market fundamentals and important

5
Bird, G., Du, W., & Willett, T. (2017). Behavioral Finance and Efficient Markets: What Does
the Euro Crisis Tell Us? Open Economics Review, 28, 273-295.
6
Hilsenrath, J. E. (2004, October 18) As Two Economists Debate Markets, The Tide Shifts. The
Wall Street Journal.
What Drives Prices in Financial Markets? McDonagh 8

information.7 These irrational decisions can be driven by various psychological factors, including

overconfidence, familiarity bias, hindsight bias, naïve diversification, and belief perseverance.8

1. Overconfidence: Speculators can become overconfident when they make many

successful investments over a short period of time. This sense of overconfidence can

cause investors to make uninformed decisions in the market.

2. Familiarity Bias: This type of bias stems from an investor’s preference for securities that

they are familiar with. Purchasing decisions driven by this type of bias can create false

demand and eventual mispricing within the market because they are not supported by any

definitive information.

3. Hindsight Bias: This type of bias occurs when an investor reflects on a past event with

the feeling that they forecasted the result. This feeling of predictive power causes one to

develop the belief that they can foresee future events that they have imperfect knowledge

of. Hindsight bias can cause an investor to irrationally make investments based on

psychological factors rather than fundamentals.

4. Naïve Diversification: When investing, some speculators attempt to diversify their

portfolio by purchasing securities that they believe will help them to broaden their range

of investments. Often, these investments are not well supported.

5. Belief Perseverance: When investors speculate, they sometimes find it hard to make

selling decisions even if new information or fundamentals refute the reason why they

7
Hilsenrath, J. E. (2004, October 18) As Two Economists Debate Markets, The Tide Shifts. The
Wall Street Journal.
8
Hendricks, C. (2015, February 5). Types of Behavioral Finance. Retrieved from
https://www.financialsymmetry.com/types-behavioral-finance/
What Drives Prices in Financial Markets? McDonagh 9

historically purchased one of their securities. This means that it is common for investors

hold onto stocks that are not financially sound.

When investors make irrational decisions due to the factors listed above, prices are driven away

from their fair value and the market is proven to be inefficient.

In summary, the Behavioral Finance View says the following:

1. Psychology, personal biases, and opinions of investors have just as much of an effect on

market fluctuations as fundamentals, information, and news would under the Efficient

Market Hypothesis.

2. The Behavioral Finance View says that consideration of more than just fundamentals

when making trading decisions leads financial markets to become imperfect.

3. Different psychological factors that drive investors to act irrationally include

overconfidence, familiarity bias, hindsight bias, naïve diversification, and belief

perseverance. Every day, investors make decisions that are driven by these factors rather

than fundamentals. Due to this irrationality, the market experiences market breakdowns

and mispricing, which ultimately leads to inefficiency.

Along with the Efficient Market Hypothesis and the Behavioral Finance View, there is

one more trading phenomenon that will be considered when researching factors that drive

prices in financial markets. Investors who conduct technical and fundamental analysis,

including momentum and non-momentum trading, consider more than just fundamentals or

psychology when making buying and selling decisions.

What Drives Prices in Financial Markets? McDonagh 10

Technical Trading

Technical and fundamental analysis are two types of trading strategies utilized in the

financial market. Technical analysis, the basis of technical trading, is the study of past stock

prices to predict future prices. This strategy analyzes past market patterns to estimate what will

take place in the future. The three principles of technical analysis are explained below. 9

1. Market Action Discounts Everything: Fundamental factors in the market are

automatically valued into the price of securities. For this reason, technical traders do not

consider “obsolete” fundamentals when making decisions.

2. Prices Move in Trends: Within technical analysis, the prices of securities tend to move in

trends and typically stay within that trend until the trend line breaks. After a trend has

been created within a security, price movement observed in the future is likely to stay in

the same direction as the trend rather than against it. This is the reasoning behind the

saying “trend is your friend” within technical trading.

3. History Repeats Itself: Many patterns observed by technical traders illustrate price

fluctuations that are repeated in a pattern. These repetitive patterns are utilized by

technical traders to buy or sell when they expect the pattern to make certain movements.

There are many technical traders who employ these price-observant tactics on a regular

basis, including momentum and non-momentum traders. Momentum trading is the act of buying

or selling securities based on strong recent price trends. For instance, if a stock’s price were to

increase by 20% within a week, momentum traders would likely purchase that security in hopes

9
What Is Technical Analysis? (n.d.). Retrieved from https://www.fidelity.com/learning-
center/trading-investing/technical-analysis/introduction-technical-analysis/what-is-
technical-analysis
What Drives Prices in Financial Markets? McDonagh 11

that the security’s valuation would continue an upward trend. Once the security’s trend line is

broken, the investor would sell the security, realize capital gains, and search for another

investment opportunity that is experiencing the same phenomenon. Non-momentum trading, on

the other hand, takes advantage of different price anomalies, such as the Holiday effect, the

January effect, and the end-of-the-year effect. These calendar anomalies consist of unsupported

but consistent increases or decreases in market fluctuation that are observed year after year.

When these anomalies occur, non-momentum trading takes place to reap the benefits of the

associated gains.10

Technical analysis is very prevalent in the market today. “The use of technical trading

strategies is widespread, with many participants relying on them, at least in part, to make their

trading decisions.”11 Interestingly, most traders tend to prefer technical analysis over

fundamental analysis when technical trading.12

Fundamental analysis is the study of a company’s financial information to determine the

security’s intrinsic value. This intrinsic value calculation is then compared to the quoted price of

the stock and analyzed for mispricing. Then, the stock is determined to be overvalued,

undervalued, or correctly valued.13 This type of analysis helps many investors to guide their

10
Frydman, R., & Goldberg, M. D. (2011). Beyond Mechanical Markets: Asset Price Swings,
Risk, and the Role of the State. Princeton, NJ: Princeton University Press.
11
Ibid.
12
Reiter, D. (2020, April 21). Why Do Most Traders Prefer Technical Analysis Over
Fundamental Analysis? Retrieved from https://digitexfutures.com/blog/most-traders-
prefer-technical-analysis/
13
What Is Fundamental Analysis? (n.d.). Retrieved from https://www.fidelity.com/learning-
center/trading-investing/fundamental-analysis/introduction-to-fundamental-analysis-
video
What Drives Prices in Financial Markets? McDonagh 12

trading decisions. When determining the intrinsic value of a stock, fundamental analysts are

likely to consider the following: company earnings, earnings per share (EPS), price-to-earnings

ratio (P/E), projected earnings growth (PEG), price-to-sales ratio (P/S), price-to-book ratio (P/B),

dividend payout ratio, dividend yield, and return on equity (ROE).14

1. Company Earnings: It is important to know how much the company is making to decide

whether the company is worthy of investing in.

2. Earnings per Share (EPS): This metric tells investors how much of the company’s

earnings are assigned to each share of stock.

3. Projected Earnings Growth (PEG): This metric estimates the stock’s one-year earnings

growth rate.

4. Price-to-Sales Ratio (P/S): This metric values the company’s stock in relation to its

revenues.

5. Price-to-Book Ratio (P/B): This metric compares the stock’s book value to its market

value.

6. Dividend Payout Ratio: This metric compares stockholder payouts to the company’s total

net income.

7. Dividend Yield: This metric compares yearly dividend payouts to share price.

8. Return on Equity (ROE): This metric compares company net income to shareholder

equity.

14
Little, K. (2020, February 13). The Top Tools for Fundamental Analysis. Retrieved from
https://www.thebalance.com/tools-of-fundamental-analysis-3140772
What Drives Prices in Financial Markets? McDonagh 13

When considered as a whole, the above metrics allow an investor to determine the intrinsic value

of a security that they are seeking to analyze for mispricing. If they find that the security is

overpriced or underpriced using this analysis, they could then act on any opportunities for profit.

Technical analysis, including momentum and non-momentum trading, as well as

fundamental analysis, are both considered technical trading tactics that have the potential to drive

prices in the financial market.

What Drives Prices in Financial Markets? McDonagh 14

Three Potential Drivers of Market Prices

To summarize, there are three potential drivers of prices in the financial market that will

be considered in this research.

1. The Efficient Market Hypothesis: This hypothesis says that fundamental factors, such

as news, public information, and other macroeconomic activity, are the largest drivers

of prices in the financial market. Under the Efficient Market Hypothesis, the financial

market is considered to be efficient in setting prices.

2. The Behavioral Finance View: Under this theory, psychology and opinions are the

largest drivers of prices within financial markets. Under the Behavioral Finance

View, the financial market is not considered to be efficient in setting prices.

3. Technical Trading: This trading tactic, that analyzes price patterns and mispricing in

the market, will also be considered when asking what drives prices in financial

markets.

In order to determine which of the above drivers are most influential in markets, Bloomberg

Wrap Reports were used to create a data set.

What Drives Prices in Financial Markets? McDonagh 15

Bloomberg Wrap Reports

At the end of each trading day, Bloomberg News publishes a report highlighting

important activity within the financial market. Each report summarizes the performance of

various stock indices as well as major current events to determine their effect on market

fluctuations. Within the reports, Bloomberg News also interviews professionals in the industry,

such as fund managers, to question their opinion of the day’s developments and their effect on

the market. These wrap reports are written to cater to professionals within the financial world but

are also utilized by amateur investors and academics alike. Full of textual data, Bloomberg Wrap

Reports serve as a window into the decision-making process of those who’s trading directly

affects and influences prices.15

Unlike quantitative data sets, Bloomberg Wrap Reports are not limited to tracking the

performance of only fundamental factors. Wrap Reports are unique because they also consider

psychological and technical conditions that might have driven the market. Bloomberg Wrap

Reports are considered the most appropriate and comprehensive source of data when asking the

question at hand.

15
Frydman, R., & Goldberg, M. D. (2011). Beyond Mechanical Markets: Asset Price Swings,
Risk, and the Role of the State. Princeton, NJ: Princeton University Press.
What Drives Prices in Financial Markets? McDonagh 16

Expectations
Before the research was conducted, I expected there to be an equal amount of support for

the Efficient Market Hypothesis, the Behavioral Finance View, and technical trading. When

learning about each of these topics, I felt as if they were all well supported and seemed realistic

enough to occur frequently in practice. Furthermore, Chapter Seven of Beyond Mechanical

Markets introduced me to the large variety of market drivers that have previously appeared in

Wrap Reports. Former University of New Hampshire student Nicholas Mangee was the first use

Bloomberg Wrap Report scoring and data creation to analyze market fluctuations, which was the

inspiration for my research. During his study, Mangee found substantial fundamental,

psychological, and technical evidence within the reports he scored,16 solidifying my

expectations.

Another expectation I developed before researching was to observe many price

fluctuations due to macroeconomic activity, international trade talks, and interest rates. During

the chosen timeline, the trade war with China was unfolding. Additionally, the Federal Reserve

was making a series of interest rate cuts. I expected these important events to warrant substantial

market movements.

16
Frydman, R., & Goldberg, M. D. (2011). Beyond Mechanical Markets: Asset Price Swings,
Risk, and the Role of the State. Princeton, NJ: Princeton University Press.
What Drives Prices in Financial Markets? McDonagh 17

Materials

There were three materials necessary to conduct this research.

1. Bloomberg Wrap Reports

a. In order to create the data set, one must have access to Bloomberg Wrap Reports

for each trading day within the chosen timeline. Bloomberg Wrap Reports can be

accessed using the Bloomberg Terminal or at www.Bloomberg.com.

2. Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State

a. This book proved to be very informative while researching. As mentioned before,

Bloomberg Wrap Report research has been conducted in the past and this book

details those findings. Beyond Mechanical Markets provides examples of different

fundamental, psychological, and technical factors that have appeared within past

reports and is very helpful throughout the entire scoring process.

3. Bloomberg Wrap Reports Scoring Workbook (Excel)

a. The Bloomberg Wrap Reports Scoring Workbook is necessary during the scoring

process. This workbook contains columns for the following fundamental,

psychological, and technical factors that are likely to appear within the Wrap

Reports:
What Drives Prices in Financial Markets? McDonagh 18

i. Date

ii. Stock Index

1. Dow, S&P 500, NASDAQ

iii. Market Fundamentals

1. Benchmark Valuation, Central Bank Communication, Company

Variables, Currency Markets, Dividends or Earnings, Financial

Institutions, Geopolitical Issues, Government or Fiscal, Housing,

Inflation Rates, Interest Rates, International Trade,

Macroeconomy, Oil, Rest of the World, Sales

iv. Psychology with Fundamentals

1. Psychology with Benchmark Valuation, Psychology with Central

Bank Communication, Psychology with Company Variables,

Psychology with Currency Markets, Psychology with Dividends or

Earnings, Psychology with Financial Institutions, Psychology with

Geopolitical Issues, Psychology with Government or Fiscal,

Psychology with Housing, Psychology with Inflation Rates,

Psychology with Interest Rates, Psychology with International

Trade, Psychology with the Macroeconomy, Psychology with Oil,

Psychology with the Rest of the World, Psychology with Sales

v. Pure Psychology

vi. Technical Trading

1. Momentum

2. Non-Momentum
What Drives Prices in Financial Markets? McDonagh 19

Procedure

Before beginning the research, I learned about the Efficient Market Hypothesis, the

Behavioral Finance View, and technical trading. By having a general understanding of these

topics, I was able to draw connections between Wrap Report contents and the market drivers in

question while I was scoring.

Next, I read Chapter Seven of Beyond Mechanical Markets: Asset Price Swings, Risk,

and the Role of the State. By reading this chapter, I became familiar with the different

fundamental, psychological, and technical factors that have historically appeared within the

Bloomberg Wrap Reports. Figures 1, 2, and 3, found in the Appendix, outline these factors.

After becoming familiar with the factors that were likely to appear within the reports, I

chose a timeline to research. The timeline I chose, spanning from June 1, 2019 to December 31,

2019, contained many different market fluctuations and I was interested to see what conclusions

the research would yield.

Once the timeline was finalized, I downloaded the appropriate Bloomberg Wrap Reports.

The next step was to learn how to score the reports. Within the Bloomberg Wrap Report

Scoring Workbook, rows were labelled by date and columns were labelled by fundamental,

psychological, and technical factors. If I found that a certain factor was noted in the Wrap Report

for a given date, I typed a “1” into the appropriate cell to indicate the factor’s appearance on that

day.

Next, I practiced my scoring technique to ensure that I was extracting as much fruitful

data as possible.

Once I was well practiced, I continued scoring until I had created data for all 133

Bloomberg Wrap Reports within my chosen timeline.

What Drives Prices in Financial Markets? McDonagh 20

Once the reports were scored, I calculated the frequency in which each factor appeared in

the data. This calculation, called factor frequency, was completed as follows:

# 𝑜𝑓 𝐷𝑎𝑦𝑠 𝑡ℎ𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 𝐷𝑟𝑜𝑣𝑒 𝑡ℎ𝑒 𝑀𝑎𝑟𝑘𝑒𝑡

𝐹𝑎𝑐𝑡𝑜𝑟 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 = 𝑥 100%
𝐿𝑒𝑛𝑔𝑡ℎ 𝑜𝑓 𝑡ℎ𝑒 𝑇𝑖𝑚𝑒𝑙𝑖𝑛𝑒 (𝑖𝑛 𝐷𝑎𝑦𝑠)

Much like Mangee, I found that this formula was very helpful when analyzing the data and

allowed me to compare each factor’s prevalence.

Once I calculated the frequency of each factor, I was able to easily determine which were

the biggest market drivers during the chosen timeline. Furthermore, I was able to use these

conclusions to decide whether the financial market is efficient or inefficient, based on the

assumptions posed in the Efficient Market Hypothesis and the Behavioral Finance View.
What Drives Prices in Financial Markets? McDonagh 21

Results

Using factor frequency results, the below factors are sorted from most frequent to least

frequent within the Bloomberg Wrap Reports published between June 1. 2019 and December 31,

2019.

1. Fundamentals with International Trade

2. Fundamentals with Interest Rates

3. Fundamentals with Macroeconomic Activity

4. Fundamentals with Dividends or Earnings

5. Fundamentals with Central Bank Communication

6. Fundamentals with the Rest of the World

7. Fundamentals with Government or Fiscal

8. Fundamentals with Company Variables

9. Psychology with Macroeconomic Activity

10. Fundamentals with Currency Markets

11. Fundamentals with Inflation Rates

12. Technical Momentum Trading

13. Psychology with Central Bank

14. Psychology with Interest Rates

15. Psychology with International Trade

16. Pure Psychology

What Drives Prices in Financial Markets? McDonagh 22

The below factors did not appear Bloomberg Wrap Reports during the chosen timeline and

were not considered to be price drivers:

• Fundamentals with Benchmark Valuation

• Fundamentals with Financial Institutions

• Fundamentals with Geopolitical Issues

• Fundamentals with Housing

• Fundamentals with Oil

• Fundamentals with Sales

• Psychology with Benchmark Valuation

• Psychology with Company Variables

• Psychology with Currency Markets

• Psychology with Dividends or Earnings

• Psychology with Financial Institutions

• Psychology with Geopolitical Issues

• Psychology with Government or Fiscal

• Psychology with Housing

• Psychology with Inflation Rates

• Psychology with Oil

• Psychology with The Rest of the World

• Psychology with Sales

• Technical Non-Momentum Trading

See Appendix Figure 4 for more specific details.

What Drives Prices in Financial Markets? McDonagh 23

Discussion

Based on the data in Figure 4, it is apparent that fundamental factors were the most

influential price drivers within in the financial market throughout the chosen timeline. Only six

of these factors were noted with a factor frequency of 10% or more. Interestingly, the top six

drivers were all fundamental factors. These factors included fundamentals with international

trade, fundamentals with interest rates, fundamentals with macroeconomic activity, fundamentals

with dividends or earnings, fundamentals with central bank communication, and fundamentals

with the rest of the world.

Fundamentals with international trade, which had a 55% factor frequency, was the most

prevalent driver of prices during the chosen timeline. Trade talks between the US and China

were discussed quite often within Wrap Reports and influenced the market more than any other

factor. For instance, the financial market was driven by this fundamental on August 2, 2019 and

was evidenced by the following Bloomberg Wrap Report excerpt: “U.S. stocks suffered the

worst week of 2019 as investors fretted over Donald Trump’s escalation of his trade war with

China.”17 This report stated that the market suffered a bad week due to the escalation of the trade

war, which was scored as a fundamental reaction to international trade.

Fundamentals with interest rates appeared with a factor frequency of 24%. During the

second half of 2019, there were several Federal Reserve FOMC meetings and rate cuts, which

caused activity in the financial market. The Bloomberg Wrap Report published on June 20, 2019

said the following: “U.S. stocks rose to a record, while sovereign bonds extended gains and the

17
Jensen, R., & Hajric, V. (2019). Stocks Suffer Worst Week of Year on Trade: Markets Wrap.
Bloomberg News.
What Drives Prices in Financial Markets? McDonagh 24

dollar slumped after central banks around the world continued a shift toward easier monetary

policy.”18 In short, this quote says that stocks reached high price levels as central banks, such as

the Fed, loosened monetary policy by cutting interest rates. This was scored as a fundamental

reaction to interest rates.

Fundamentals with macroeconomic activity was noted with a factor frequency of 22%.

Both trade talks and interest rate cuts influence macroeconomic activity, so it is not surprising

that these fundamentals were a main influencer of market prices. On September 6, 2019,

Bloomberg News said the following about macroeconomic activity and the labor market: “Stocks

rose earlier after hiring data signaled a strong labor market that isn’t too strong to deter further

easing.”19 In summary, this quote says that stock prices rose due to the strong labor market,

which is an important macroeconomic factor. This excerpt was scored as a fundamental reaction

to macroeconomic activity on this day.

Fundamentals with dividends or earnings had a factor frequency of 16%. Company

earnings are often indicative of economic slowdown and trade strife due to their effects on

company’s bottom lines. As mentioned before, there were many current events pertaining to the

macroeconomy and international trade that unfolded at the end of 2019. If investors were to note

that company earnings were drastically decreasing due to these factors, they are likely to

reorganize their portfolio which would influence fluctuations in the market.

18
Hajric, V., & Ponczek, S. (2019). Stocks Rise to Record As 10-Year Yield Hits 2%: Markets
Wrap. Bloomberg News.
19
Jensen, R., & Hajric, V. (2019). Stocks Cap Weekly Gain After Powell, Jobs Data: Markets
Wrap. Bloomberg News.
What Drives Prices in Financial Markets? McDonagh 25

Fundamentals with central bank communication, with a factor frequency of 12%, was

often noted due to Federal Reserve rate cuts during this timeline and was also considered a driver

of prices.

With a factor frequency of 10%, fundamentals with the rest of the world was the sixth

most prevalent factor to drive the market. The reoccurrence of this fundamental was credited to

trade tensions between the US and China, due to their influence on the entire world.

There were only five psychological factors that, within this timeline, drove financial

market prices. The most influential psychological factor was psychology with macroeconomic

activity, which had a factor frequency of only 4%. An example of psychology with

macroeconomic activity was highlighted within the October 1, 2019 Wrap Report and said the

following: “Stocks slid and Treasuries rose after a gauge of U.S. manufacturing posted the

weakest reading since the end of the last recession, fueling fears of an impending global

slowdown and boosting haven assets.”20 This quote tells readers that stocks slid due to fear of a

global shutdown. As a result, psychology with macroeconomic activity was scored on this day.

Following psychology with macroeconomic activity was psychology with the central

bank, psychology with interest rates, psychology with international trade, and pure psychology.

Each of these factors appeared with a frequency of 1%.

Momentum trading was the only type of technical trading that was apparent over the

course of this research, appearing with a 2% factor frequency. On December 19, 2019,

Bloomberg said the following pertaining to momentum trading: “U.S. stocks bounced back to

20
Jensen, R., & Ponczek, S. (2019). Stocks Fall Most Since August on Weak Factory Data:
Markets Wrap. Bloomberg News.
What Drives Prices in Financial Markets? McDonagh 26

claim fresh records as investors chased gains that have added more than $5 trillion to valuations

this year.”21 When investors chase gains, this is considered momentum trading and it was scored

as such. Non-momentum trading did not drive market fluctuations within this seven-month

timeline.

Before the research was conducted, there were two expectations:

1. There will be equal representation of fundamental, psychological, and technical factors

due to their theoretical support.

2. Talks of macroeconomic activity, international trade, and interest rates will be prevalent

within the Bloomberg Wrap Reports.

As proven within the research, Expectation 1 was not met. Within the timeline in question,

there were many current events and news releases that fueled fundamental decisions in the

financial market and had a large influence on prices. For this reason, fundamental factors

appeared within Bloomberg Wrap Reports more often than psychology and technical trading.

Due to the ongoing current events mentioned above, Expectation 2 was met. During the

beginning of this process, international trade talks and interest rate cuts were already underway

and continued throughout the end of 2019.

21
Herron, J., & Ballentine, C. (2019). U.S. Stocks Resume Record Setting Year-End Rally:
Markets Wrap. Bloomberg News
What Drives Prices in Financial Markets? McDonagh 27

Conclusions

After analyzing the data, I confidently concluded that fundamental factors were the

largest drivers of prices in the financial market during the chosen timeline. Due to the factor

frequency of fundamentals compared to psychological and technical factors within the reports, it

was apparent that fundamentals had a greater influence on market prices.

Due to the support of fundamental factors that the Bloomberg Wrap Reports provided, I

also concluded that the Efficient Market Hypothesis holds true in practice. As mentioned before,

EMH says that fundamental factors, such as news and information, have the greatest effect on

buying and selling decisions in the financial market. EMH also defends that financial markets are

efficient in valuing securities, due to the immediate nature of the market to price assets based on

fundamental factors. Finally, EMH also mentions that financial markets are impossible to beat

and that a passive investing strategy is more advantageous in the market. Because the Efficient

Market Hypothesis was so well supported during this research, the conflicting Behavioral

Finance View was refuted. Additionally, technical trading was not considered prevalent enough

to influence market prices.

All things considered, this research concluded the following:

1. Fundamental factors, such as news and information, drive prices in financial markets.

2. Markets are efficient in setting the prices of listed securities.

3. Financial markets are impossible to beat.

4. Trading based on psychological factors and technical trading do not drive prices in

financial markets.
What Drives Prices in Financial Markets? McDonagh 28

Follow Up

Although expectations predicted equal support of fundamentals, psychology, and

technical trading within the Bloomberg Wrap Reports, my research concluded that the Efficient

Market Hypothesis and it’s stipulations are supported in practice. Throughout the entire research

process, the Wrap Reports showed a glaring preference for fundamental factors as market

drivers. This was shocking, especially because past research and scoring of these reports

displayed more representation of psychological and technical factors as market drivers.

Listed below are a few discrepancies that may explain why my conclusions differed from

those of Nicholas Mangee and others who have conducted this research in the past. Mangee’s

data can be found in Figure 5 for reference.

1. The Bloomberg Wrap Reports are written differently now than they were in prior years.

The Wrap Reports that are published today are shorter than the ones that past researchers

have utilized, meaning that the current contents of reports may be limited and less

inclusive.

2. There is large number of Bloomberg news reporters who contribute to these reports.

Some contributors may consider certain factors important while others do not. For this

reason, reports may lack consistency and equal representation of fundamentals,

psychology, and technical trading as drivers of market price.

3. The timeline I chose to study was very short. This seven-month period was packed with

current events pertaining to government policies, as well as Federal Reserve rate cuts and

other fundamental macroeconomic considerations. Past researchers have studied much

longer timelines, sometimes spanning many business cycles. Within longer timelines, a
What Drives Prices in Financial Markets? McDonagh 29

greater number of current events take place, meaning that their data is likely to be more

inclusive and diverse.

4. All researchers conduct their work differently. Although the scoring criteria was well

described within Beyond Mechanical Markets, everyone has a different interpretation of

the reports that they read. This may lead to differences in scoring from person to person.

Although my conclusions did not exactly align with those of past researchers, it is

important to note that the financial market is extremely dynamic and everchanging. Because

of this, it is unlikely for any two data sets to draw the same conclusions. Many simultaneous

current events unfolded during the chosen timeline, each with their own unique economic

consequences. Overall, I feel as if my data set was a complete and accurate representation of

the market fluctuations that took place and I am confident in my conclusion that

fundamentals were the greatest drivers of the financial market during the second half of

2019.
What Drives Prices in Financial Markets? McDonagh 30

Appendix

Figure 1: Fundamental Factors Influencing Daily Stock Prices

What Drives Prices in Financial Markets? McDonagh 31

Figure 2: Psychological Factors Influencing Daily Stock Prices

Figure 3: Technical Factors Influencing Daily Stock Prices

Figures 1, 2, and 3 are extracted from Beyond Mechanical Markets.22

22
Frydman, R., & Goldberg, M. D. (2011). Beyond Mechanical Markets: Asset Price Swings,
Risk, and the Role of the State. Princeton, NJ: Princeton University Press.
What Drives Prices in Financial Markets? McDonagh 32

Figure 4: Factor Frequency in Bloomberg Wrap Reports Published Between June 1, 2019 and

December 31, 2019

Stock Indices
Dow 47%
S&P 500 93%
NASDAQ 47%
Fundamentals, Psychology, or Technical Factors
Fundamentals with International Trade 55%
Fundamentals with Interest Rates 24%
Fundamentals with Macroeconomic Activity 22%
Fundamentals with Dividends or Earnings 16%
Fundamentals with Central Bank Communication 12%
Fundamentals with the Rest of the World 10%
Fundamentals with Government or Fiscal 6%
Fundamentals with Company Variables 4%
Psychology with Macroeconomic Activity 4%
Fundamentals with Currency Markets 3%
Fundamentals with Inflation Rates 2%
Technical Momentum Trading 2%
Psychology with Central Bank 1%
Psychology with Interest Rates 1%
Psychology with International Trade 1%
Pure Psychology 1%
Fundamentals with Benchmark Valuation -
Fundamentals with Financial Institutions -
Fundamentals with Geopolitical Issues -
Fundamentals with Housing -
Fundamentals with Oil -
Fundamentals with Sales -
Psychology with Benchmark Valuation -
Psychology with Company Variables -
Psychology with Currency Markets -
Psychology with Dividends or Earnings -
Psychology with Financial Institutions -
Psychology with Geopolitical Issues -
Psychology with Government or Fiscal -
Psychology with Housing -
Psychology with Inflation Rates -
Psychology with Oil -
Psychology with the Rest of the World -
Psychology with Sales -
Technical Non-Momentum Trading -
What Drives Prices in Financial Markets? McDonagh 33

Figure 5: Factor Frequency in Bloomberg Wrap Reports Published Between January 4, 1993 and

December 31, 2009

What Drives Prices in Financial Markets? McDonagh 34

References

Bird, G., Du, W., & Willett, T. (2017). Behavioral Finance and Efficient Markets: What Does the

Euro Crisis Tell Us? Open Economics Review, 28, 273-295.

Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The
Journal of Finance, 25, 383-417.
Frydman, R., & Goldberg, M. D. (2011). Beyond Mechanical Markets: Asset Price Swings, Risk,
and the Role of the State. Princeton, NJ: Princeton University Press.
Hajric, V., & Ponczek, S. (2019). Stocks Rise to Record As 10-Year Yield Hits 2%: Markets
Wrap. Bloomberg News.
Hendricks, C. (2015, February 5). Types of Behavioral Finance. Retrieved from

https://www.financialsymmetry.com/types-behavioral-finance/

Herron, J., & Ballentine, C. (2019). U.S. Stocks Resume Record Setting Year-End Rally:

Markets Wrap. Bloomberg News

Hilsenrath, J. E. (2004, October 18) As Two Economists Debate Markets, The Tide Shifts. The

Wall Street Journal.

Jensen, R., & Hajric, V. (2019). Stocks Cap Weekly Gain After Powell, Jobs Data: Markets

Wrap. Bloomberg News.

Jensen, R., & Hajric, V. (2019). Stocks Suffer Worst Week of Year on Trade: Markets Wrap.

Bloomberg News.

Jensen, R., & Ponczek, S. (2019). Stocks Fall Most Since August on Weak Factory Data:

Markets Wrap. Bloomberg News.

Little, K. (2020, February 13). The Top Tools for Fundamental Analysis. Retrieved from

https://www.thebalance.com/tools-of-fundamental-analysis-3140772

Malkiel, B. G. (2003). The Efficient Market Hypothesis and Its Critics. The Journal of Economic
What Drives Prices in Financial Markets? McDonagh 35

Perspectives, 17, 59-82.

Malkiel, B. G. (2005). Reflections on the Efficient Market Hypothesis: 30 Years Later. The
Financial Review, 40, 1-9.
Reiter, D. (2020, April 21). Why Do Most Traders Prefer Technical Analysis Over

Fundamental Analysis? Retrieved from https://digitexfutures.com/blog/most-traders-

prefer-technical-analysis/
What Is Fundamental Analysis? (n.d.). Retrieved from https://www.fidelity.com/learning-

center/trading-investing/fundamental-analysis/introduction-to-fundamental-analysis-

video

What Is Technical Analysis? (n.d.). Retrieved from https://www.fidelity.com/learning-

center/trading-investing/technical-analysis/introduction-technical-analysis/what-is-

technical-analysis