In the price of assets fully depend on


In this part I will try to talk briefly
about what the current literature speaks about all the three different theories
of investing. Abreu and Brunnermeir in their research state that the efficient
market hypothesis and the behavioral finance theory have been the pillar of
asset pricing in the last five decades but are quite opposing in nature. The efficient
markets suggests that market prices fully realize the value of new information
and the price of the assets depends on information whereas behavioral dictates
that the price of assets fully depend on the reaction of market participants to
the interpretation of the news (Abreu & Brunnermeier, 2003).  

The
best example that we can is that of cryptocurrency where a lot of investors are
pouring money to realize quick returns. LiteCoin, a type of cryptocurrency
showed a very sharp decline in the prices even though there was no news of its
fundamentals but when the founder uncashed all its money, people reacted
differently and started selling it thus crashing the prices. One more example
is when the CEO of the company falls sick or quits a company, even though there
is no change in the fundamentals of the company still the stock prices fall because
of the sentiment of people that there must be something wrong in the company
that led to the resignation of the CEO.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

It’s
the psychology of people that prevails here and clearly conveys the message
that data related to the company is lopsided and it is such news that hugely
affect assets pricing. Each market participant tries to process data and news
in different ways and translates his decision in the market in different ways altogether.
Also the likelihood of increments in resource costs past the fundamental value
is directed by the information over a period.

It
appears that market members do respond to certain outrageous occasions, for
example, 11 September 2001 terrorist attacks, Lehman Brothers Bankruptcy and
the Japanese tsunami of 2011. These type of events are a catastrophe and it
leads to blow up of the market as a result of investors panic. Caballero and
Krishnamurthy pointed out that it is news and not essentials impacting the
monetary markets amid any money related emergency (Caballero &
Krishnamurthy, 2008).

Fama,
another top researcher in the field of economics talks about the overvalued and
under reaction theory that benefits the asset bubble burst. In this context let’s
talk about the housing mortgage prices and underlying CDCs as an example. There
had been a huge over valuation of housing sector in the United States in the mid-2000s
which led to creation of a huge asset bubble. Investor sentiment was so high
that people started investing in CDCs based on infrastructure bonds hoping for
high returns that they failed to analyse the underlying fundamentals. This is a
classic case of over valuation of a sector which ultimately led to the asset
burst and the depression in 2008-09. The investors were so blinded that they
choose to under react even when people started to fail in their mortgage
payments, the CDCs that were built on top of it did not show any price decline.
Fama states that the principal shortcoming of proficient markets which consists
of overconfident investors is that the belief that asset price bubbles can’t
exist because of levelheaded, educated and financed arbitrageurs who will stabilize
the markets in terms of efficient market hypothesis. This features the troubles
of arranging techniques amid scenes of benefit value rises, since it is
exceptionally hard to know when an asset price bubble will burst.

Generally,
neoclassical financial matters and the efficient market hypothesis don’t
clarify certain sorts of practices in the money related market, for example,
asset bubble bursts and market members’ responses to news or data. Daniel and
Subramanyam state that as a part of series of experiments especially on asset
bubble burst they concluded that lesser is the under reaction of people more
that correct valuation of stocks based on fundamental data. Effective market
speculation coupled with a diversified behavioral fund hypothesis are the
drivers of asset pricing in today’s information era (Daniel, Hirshleifer, &
Subrahmanyam, 1998).

 

Barlevy
et al pointed out some of the solid shortcomings that value benefits based on
speculations (Barlevy, 2007). They state out that even though behavior
plays a major role but the returns offered by it are just based on speculations
and eventually market stabilizes based on fundamentals. Anderson supports the
behavior hypothesis and concludes that unintentionally, the behavioral back
hypothesis could be stretched out to clarify the productive market theory by
utilizing the overcompensation/under reaction relentless state and the key is
this is testable. So generally the behavioral back hypothesis is a more entire
and hence hypothetically unrivaled hypothesis of advantage estimating.

x

Hi!
I'm William!

Would you like to get a custom essay? How about receiving a customized one?

Check it out