Critically evaluate the market efficiency under different behavioral models.
Efficient market hypothesis is considered to be the hypothesis that a the financial stock prices effectively incorporate all the key public data and information and the prices can be considered as minimal determination for the original investment value at all time. Behavioral Model is considered to be one of the vital part of the finance as it seeks to identify and understand the systematic financial market implication of key psychological decision method (Kartašova, Remeikiene, Gaspareniene & VenclauskienÄ—, 2014). The models within the traditional finance paradigm considered the investor, who act rationally and assume all the key information in the decision making strategy. The modern portfolio theory, capital asset pricing model and arbitrage pricing theory are the key quantitative models which undertake the ration expectation based theories.
Behavioral model paradigm has risen in the key outcome to the issues faced by the traditional paradigm. It considerable focus on the key investment alternative which are not always based on the full rationally and it tries to determine the investment market phenomena on the basis of two key principle such as firstly agent fail to regularly update their key beliefs accurately and secondly systematic deviation from the overall normative process in making investment alternatives.
Behavioral model also focus to argue that there is a strict limit to arbitrage which permits the investor irrationally to be constant and long live on the overall impact on prices. To determine and explain the investor irrationality and their key decision making process, behavioral model focus on the experimental evidence of the cognitive psychology (Smith, 2008).
Behavioral model considered being most successful in identifying and explaining the stock prices anomalies related to the overall overreaction, under reaction and key momentum strategies, firm size impact and BV/MV ratio impact (Smith, 2008). Behavioral model is considered to be most efficient in determining and identifying the stock prices anomalies to overreaction, momentum strategies, under reaction, firm size and value versus growth effects.
Kartašova, J., Remeikiene, R., Gaspareniene, L., & VenclauskienÄ—, D. (2014). Transformations of Efficient Market Hypothesis under the Influence of Behavioral Finance. MJSS. https://dx.doi.org/10.5901/mjss.2014.v5n13p327
Smith, D. (2008). Moving from an Efficient to a Behavioral Market Hypothesis. Journal Of Behavioral Finance, 9(2), 51-52. https://dx.doi.org/10.1080/15427560802093589