Essay sample - Efficient Market Theory & Behavioural Finance with regard to Financial Crisis 2007-2010

Efficient Market Theory & Behavioural Finance with regard to Financial Crisis 2007-2010  Essay example
Masters
Essay
Finance & Accounting
Pages 6 (1506 words)
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A market is efficient with respect to the available information set if the market prices fully reflect that information (Fama, 1970, p.383). Therefore, in an efficient market it is impossible for investors and portfolio managers to earn excess returns by holding a portfolio of randomly selected stocks with comparable risks. …

Introduction

Behavioural Finance is a blend of psychology with finance, a contribution by Psychologists Daniel Kahneman and Amos Tversky, along with Richard Thaler, a University of Chicago professor and his colleague Nicholas Barberis. Their works have encouraged many scholars to pursue research in this unusual and different-from-classical-approach field. In this paper, there is the analyses of the two theories, the causes of the Financial Crisis and if EMH has direct implications in it. There is an explanation how behavioural finance can explain the anomalies which have persisted too long to lead to this crisis situation. Analysis Efficient Market Hypothesis A market is efficient with respect to the available information set if the market prices fully reflect that information (Fama, 1970, p.383). Therefore, in an efficient market it is impossible for investors and portfolio managers to earn excess returns by holding a portfolio of randomly selected stocks with comparable risks. The efficient market hypothesis is based on the Random Walk Hypothesis, which states that the changes in a stock’s price are a random departure from its previous price. The set of assumptions, which imply an efficient capital market, are: 1. ...
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