Efficient Market Hypothesis and Behavioral Finance

5921 WordsFeb 19, 201224 Pages
Efficient market hypothesis and Behavioral finance Fall 2011 Teacher: Guðrún Johnsen V-780-BFIM Student: Rúnar Guðnason SSN:1804784939 Table of Contents Introduction ................................................................................................................................ 3 1.1 Efficient market hypothesis .................................................................................................. 3 1.2 A criticism on the efficient market hypothesis ................................................................. 4 2.1 Behavioral finance and the efficient market hypothesis ...................................................... 5 2.2 Prospect theory and Loss aversion…show more content…
The strong form claims that asset prices fully reflect all of the public and inside information available, therefore no one can have advantage on the market in predicting prices. The introduction of the efficient market hypothesis marked a turning point in scholarly researches on security prices and many studies have been made since to test market efficiency. Many studies of the weak form of market efficiency have been made on technical analyses and how investors use them to predict about future security prices by looking at past prices. In 1969 Fama, Fisher, Jensen and Roll were the first to test the semi-strong form of market efficiency by using event studies. Their conclusion was that stock prices adjust very rapidly to new information. Many scholars since then have studied how new information affect the market by using event studies. Many articles about the strong form have also been published and most of them study professional investor performances in the stock market (Malkiel, 2003). Many of the studies on technical analyses, event studies and the performance of professional investors in the stock market have reached the conclusion that markets are efficient and therefore that stock prices are right (Malkiel, 2003). Before studies of behavioral finance became popular, evidences began to appear that were inconsistent with the hypothesis of market efficiency. 1.2 A criticism on the efficient market hypothesis In 1976, Rozeff and Kinney published an
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