AN INSIGHT INTO BEHAVIORAL FINANCE MODELS, EFFICIENT MARKET HYPOTHESIS AND ITS ANOMALIES
Keywords:
Behavioral Models, Outperformance, Anomalies, EMHAbstract
This research attempts to explain the literature on Efficient Market Hypothesis, its anomalies and also a brief discussion on different trading Strategies. In this part, we will discuss various Behavioral Finance Models like Over and Under-reaction, Mental Compartments, Over Confidence, Disjunction Effect, Limits to Arbitrage in addition to the theories of human behavior like Prospect and Expected Utility Theories.
In the initial part of this research, we have explained how security prices incorporate all information immediately without giving the chance to the investors to profit from them. We have also discussed the foundation of market efficiency to exist on satisfaction of any of the three conditions that are ‘Rationality’, ‘Independent deviation from Rationality’ and ‘Arbitrage’ (Andrei Shleifer). Our research also gives answer to the question that how prices incorporates the various types of information given in different sets i.e. Weak, Semi-strong and Strong forms. Behavioral Finance models such as prospect theory, expected utility theory, overconfidence, over and under reaction, mental compartments, Disjunction effect and limits to arbitrage are also studied as none of the three conditions given above satisfies in reality and hence explained as anomalies of market efficiency. The three different trading strategies i.e. Momentum, Contrarian and Technical are also analyzed but only momentum and contrarian are much preferred by the academics and investors.
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