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Behavioral Finance - Research Paper Example

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Behavioral Finance

383)
-The weak form hypothesis asserts that stock prices already reflect all information that can be derived by examining market trading data such as the history of past prices, trading volume, or short interest.
Numerous papers have demonstrated that early identification of new information can provide substantial profits. Insiders who trade on the basis of privileged information can therefore make excess returns, violating the strong form of the efficient market hypothesis. Even the earliest studies by Cowles (1933,1944), however, make it clear that investment professionals do not beat the market. It has already been stated that an efficient market is one where the prices of securities fully reflect all available information, but then what are the sufficient conditions for capital market efficiency In an idealized world, such conditions would be
The debate about market efficiency has resulted in thousands of empirical studies and literature attempting to determine whether particular markets are in fact 'efficient', and if so to what degree. In fact, the majority of studies and researches of technical theories have gone to the result that it is difficult to predict prices. Moreover, the random walk theory indicates that price movements will not follow any trends and so by knowing the past price movements it's not possible to predict the future price movements. All these state that markets are in fact efficient. However, researchers have also exposed many stock market anomalies that seem to be inconsistent with the efficient market hypothesis.
Trading strategies seem to be widespread among fund managers and there is little evidence that they would generate excess returns in practice (Malkiel, 2003). Evidence proof that the use of trading strategies might be closely related to behavioural anomalies. It is impossible to consistently make abnormal returns using a trading strategy based on a given set of information when the markets are efficient. This postulate, of course, is based on the premise that (1) all investors have cost-less access to currently available information about the future; (2) they are good analysts; and (3) they pay close attention to the market process and adjust their holdings appropriately. Till the late seventies, empirical studies supported the view that the capital markets are informationally efficient. Many models related to security valuation have been based on this concept of 'informational efficiency of capital markets.' However, the late seventies and the eighties brought in evidences questioning the validity and highlighting various anomalies related to the capital market efficiency. There are many focused studies that ...Show more

Summary

The efficient market hypothesis indicates that since market prices reflect all available information, containing information about the future, the only difference between the stock prices at time t and time t + 1 are phenomenon that can not possibly be predicted…
Author : jbarrows
Behavioral Finance essay example
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