Great Deal! Get Instant $10 FREE in Account on First Order + 10% Cashback on Every Order Order Now

You work as a researcher at an actively managed equity fund. Your supervisor makes the following statement to you. “Eugene Fama won the Nobel Prize in Economics in 2013 and Richard Thaler won it in...

1 answer below »

You work as a researcher at an actively managed equity fund. Your supervisor makes the following statement to you.

“Eugene Fama won the Nobel Prize in Economics in 2013 and Richard Thaler won it in 2017. Their views on market efficiency and behavioural finance are, however, quite different.”

She assigns you the task of writing a critical essay evaluating the arguments of the two Nobel Laureates and the implications of these for the fund. You should utilise existing literature (scholarly journals) on market efficiency and behavioural finance as well as real world examples to support your arguments. Your essay should include a conclusion on market efficiency and any implications of your research for the future direction of the fund.

Answered Same Day May 02, 2020 EFB201

Solution

Aarti J answered on May 08 2020
154 Votes
Market efficiency and behavioural finance
Course Name
Course date
Student’s Name
Market efficiency and behavioural finance                            6
Market efficiency and behavioural finance
Introduction
Behavioral finance can be said as the principle which integrates the economic principles with the human behaviour.
Belsky and Gilowich (1999) stated behavioral finance is a kind of a behavioral economics which is a combination of psychology and economics, which helps in explaining the rational and the i
ational behaviour of the investors when buying or investing money in the market.
The market efficiency is greatly affected by the behaviour of the market. There are different authors who have presented different views about market efficiency. There has been many researches which has taken place to know about the market return and efficiency, it states how the market reacts in different conditions. The major studies about the market efficiency theory was done in the year 1960’s and 1970’s by different authors and researchers. The first contribution was make by Louis Bachelier which stated that the stock market is just based on speculation. The actual theory stated with Samuelson who was able to prove the existence of the market efficiency theory and hypothesis with the help of the stocks and the market. Different authors like Jenson and Malkiel also gave different output for the efficiency of the market. (Jensen, M.C. 1978)
Malkiel (1992) stated that when the prices of the stocks remain unchanged a stock market is efficient. The authors have also presented the fact that the market efficiency also lies around the investors intention and his behaviour.
Fama has stated three different forms of market efficiency conditions which includes the weak form of efficient market. The weak form of efficient market is the condition where the investors can generate higher portfolio returns as compared to the market returns by trading on the stocks which are based on the past pricing. In the weak form, the technical analysis of the stock cannot be used.
A semi-strong market efficiency is the time where the investor cannot beat the market returns by using the trading strategies which are based on the information which is published by the public. This form does not consider fundamental analysis and considers it to be ineffective.
When the market is strong, then the insider trading on the stocks will also not be able to beat the market return and the stocks will not outperform the market.
The recent studies have showed that the stocks are not only effected by the economic conditions but also stock returns are affected by the January effect, the weekend effect and the month end effect. In these cases, the time series of the stock returns are usually inconsistent with the returns as per the market efficiency ratios.
Fama’s Research
Eugene Fama is one of the biggest researchers in the behavioural finance, who has presented in doctoral dissertation on the behaviour of the stock market prices which states that the market is efficient. The competition and the economic conditions are the main factors which has resulted in the fluctuation of the share prices. It is difficult for one to find consistent and profitable anomalies.
Fama (1970, p. 383) states and defines the market efficiency as ““a market in which prices always fully reflect available information” and makes a distinction between different types of efficient markets based on three concretions of the concept “available information” i.e. weak form efficient markets (historical price information); semi-strong form efficient markets (all publicly available information); and strong form efficient markets (all information, both public and private)”
Fama stated that the efficient market is the market which reflects all the available information about the stocks and the market returns. He stated that the market is efficient at the weak form. He also stated that it is not possible to have a co
ect test on the market...
SOLUTION.PDF

Answer To This Question Is Available To Download

Related Questions & Answers

More Questions »

Submit New Assignment

Copy and Paste Your Assignment Here