Intelligence and global bias in the stock market

Abstract

Trade is one of the essential features of human intelligence. The securities market is the ultimate expression of it. The fundamental indicators of stocks include information about the effects of noise and bias on stock prices; however, distinguishing between them is generally hard. In this article, I present the fundamentals hypothesis based on rational expectations and detect the global bias components from the actual fundamental indicators using a log-normal distribution model based on the fundamentals hypothesis. The analysis results show that biases generally exhibit the same characteristics, strongly supporting our theory. Notably, the positive price-to-cash flows from the investing activities ratio are proxies for the fundamentals. The answer is simple: "Cash is a fact, and profit is an opinion." Namely, opinions of management and accounting added noise to fundamentals. As a result, we obtain the Kesten process and the Pareto distribution. This result means the market knows this noise and shows a stable global bias in the stock market.