Capital Market Anomalies Explained By Human S Irrationality

Why do small caps achieve higher risk-adjusted yields than large caps? Why do stock prices increase or decrease upon an index entry respectively deletion? Why does January records higher yields than the remaining months of the year? These as well as other observed capital market anomalies or phenomena could be insufficiently explained by the classical capital market theory, which proceeds on the assumptions that all correspondent information are reflected in the stock prices, all negative effects are directly balanced on the market level and that efficiency of arbitrage principle exists as well as that all market participants act rationally (i.e. optimizing their benefits in the sense of the homo economicus). This motivated some economists and psychologists to include behavioural scientific findings in their research of the influences on the formation of prices on the capital market. In the 1980s the theory of Behavioural Finance was developed, which challenges the homo economicus. Researchers came to the conclusion that humans are not only acting rational, but that they are also influenced by emotions, knowledge and experiences. This new scientific behavioural oriented theory, which is today a separate branch of research, contradicts the classical capital market theory and supplies explanations for the observed phenomena on the capital market. The aim of this book is to demonstrate how human behaviour influences the development on the capital market and how Behavioural Finance serves as an explanation for the empirically observed capital market anomalies. This book begins with the introduction of the theoretical basis of Behavioural Finance and its emergence; tasks as well as aims will be explained in detail. Subsequently, human's heuristics as well as anomalies and irrationalities in their decision making process will be demonstrated. In the third chapter, the capital market anomalies or phenomena as well as the irrational and behavioural reasons for their existen

The Efficient Market Hypothesis believes that it is impossible for an investor to outperform the market because all available information is already built into stock prices. However, some anomalies could persist in stock markets while some other anomalies could appear, disappear and re-appear again without any warning. A Special Issue on "Efficiency and Anomalies in Stock Markets" will be devoted to advancements in the theoretical development of market efficiency and anomaly in the Stock Market, as well as applications in Stock Market efficiency and anomalies.

The efficiency of global financial markets has long been a topic of contention for both academics and industry professionals alike. Evidence suggests that most of the time, asset markets do a good job of correctly processing and assimilating information into prices. However, a substantial literature has built up proof which indicates that this is quite often not the case. A wide variety of anomalies and so called 'effects' have been documented revealing stock price behaviour that is inconsistent with the predictions of traditional models. These inconsistencies illustrate departures from theory and are unexplainable within the mainstream economics paradigm; conversely, many anomalies can be accounted for using explicit insights from behavioural finance. This study discusses the theoretical debate and investigates whether financial markets are affected by superstition and if so, if this is reflected in asset prices. A new discovery is added to the literature, namely the Friday 17th anomaly; with regard to the Italian MIB Storico index results indicate that in comparison to regular Fridays - which are aggregately positive - returns for Friday the 17th are four times larger and statistically different.

The presence of speculative bubbles in capital markets (an important area of interest in financial history) is widely accepted across many circles. Talk of them is pervasive in the media and especially in the popular financial press. Bubbles are thought to be found primarily in the stock market, which is our main interest, although bubbles are said to occur in other markets. Bubbles go hand in hand with the notion that markets can be irrational. The academic community has a great interest in bubbles, and it has produced scholarly literature that is voluminous. For some economists, doing bubble research is like joining the vanguard of a Kuhnian paradigm shift in economic thinking. Not so fast. If bubbles did exist, they would pose a serious challenge to neoclassical finance. Bubbles would contradict the ideas that markets are rational or work in an informationally efficient manner. That’s what makes the topic of bubbles interesting. This book reviews and evaluates the academic literature as well as some popular investment books on the possible existence of speculative bubbles in the stock market. The main question is whether there is convincing empirical evidence that bubbles exist. A second question is whether the theoretical concepts that have been advanced for bubbles make them plausible. The reader will discover that I am skeptical that bubbles actually exist. But I do not think I or anyone else will ever be able to conclusively prove that there has never been a bubble. From studying the literature and from reading history, I find that many famous purported bubbles reflect inaccurate history or mistakes in analysis or simply cannot be shown to have existed. In other instances, bubbles might have existed. But in each of those cases, there are credible rational explanations. And good evidence exists for the idea that even if bubbles do exist, they are not of great importance to understanding the stock market.

A new, evolutionary explanation of markets and investor behavior Half of all Americans have money in the stock market, yet economists can’t agree on whether investors and markets are rational and efficient, as modern financial theory assumes, or irrational and inefficient, as behavioral economists believe. The debate is one of the biggest in economics, and the value or futility of investment management and financial regulation hangs on the answer. In this groundbreaking book, Andrew Lo transforms the debate with a powerful new framework in which rationality and irrationality coexist—the Adaptive Markets Hypothesis. Drawing on psychology, evolutionary biology, neuroscience, artificial intelligence, and other fields, Adaptive Markets shows that the theory of market efficiency is incomplete. When markets are unstable, investors react instinctively, creating inefficiencies for others to exploit. Lo’s new paradigm explains how financial evolution shapes behavior and markets at the speed of thought—a fact revealed by swings between stability and crisis, profit and loss, and innovation and regulation. An ambitious new answer to fundamental questions about economics and investing, Adaptive Markets is essential reading for anyone who wants to understand how markets really work.

Investment pioneer Len Zacks presents the latest academic research on how to beat the market using equity anomalies The Handbook of Equity Market Anomalies organizes and summarizes research carried out by hundreds of finance and accounting professors over the last twenty years to identify and measure equity market inefficiencies and provides self-directed individual investors with a framework for incorporating the results of this research into their own investment processes. Edited by Len Zacks, CEO of Zacks Investment Research, and written by leading professors who have performed groundbreaking research on specific anomalies, this book succinctly summarizes the most important anomalies that savvy investors have used for decades to beat the market. Some of the anomalies addressed include the accrual anomaly, net stock anomalies, fundamental anomalies, estimate revisions, changes in and levels of broker recommendations, earnings-per-share surprises, insider trading, price momentum and technical analysis, value and size anomalies, and several seasonal anomalies. This reliable resource also provides insights on how to best use the various anomalies in both market neutral and in long investor portfolios. A treasure trove of investment research and wisdom, the book will save you literally thousands of hours by distilling the essence of twenty years of academic research into eleven clear chapters and providing the framework and conviction to develop market-beating strategies. Strips the academic jargon from the research and highlights the actual returns generated by the anomalies, and documented in the academic literature Provides a theoretical framework within which to understand the concepts of risk adjusted returns and market inefficiencies Anomalies are selected by Len Zacks, a pioneer in the field of investing As the founder of Zacks Investment Research, Len Zacks pioneered the concept of the earnings-per-share surprise in 1982 and developed the Zacks Rank, one of the first anomaly-based stock selection tools. Today, his firm manages U.S. equities for individual and institutional investors and provides investment software and investment data to all types of investors. Now, with his new book, he shows you what it takes to build a quant process to outperform an index based on academically documented market inefficiencies and anomalies.

TOPICS IN THE BOOK Influence of Investor Behavior on Investment Choices among Equity Fund Managers of Listed Firms at Nairobi Securities Exchange-Kenya Effect of Investment Diversification in Real Estate on the Financial Performance of Retirement Benefits Schemes in Kenya Factors Limiting Credit Uptake among the Youth in Kenya Impact of Financial Regulations on Market Liquidity in Germany Exchange Rate Volatility and International Trade in Turkey

This book discusses capital markets and investment decision-making, focusing on the globalisation of the world economy. It presents empirically tested results from Indian and Southwest Asian stock markets and offers valuable insights into the working of Indian capital markets. The book is divided into four parts: the first part examines capital-market operations, particularly clearance and settlement processes, and stock market operations. The second part then addresses the functioning of global markets and investment decisions; more specifically it explores calendar anomalies, dependencies, overreaction effect, causality effect and stock returns volatility in South Asia, U.S. and global stock markets as a whole. Part three covers issues relating to capital structure, values of firm and investment strategies. Lastly, part four discusses emerging issues in finance like behavioral finance, Islamic finance, and international financial reporting standards. The book fills the gap in the existing finance literature and helps fund managers and individual investors make more accurate investment decisions.

Behavioral Finance helps investors understand unusual asset prices and empirical observations originating out of capital markets. At its core, this field of study aids investors in navigating complex psychological trappings in market behavior and making smarter investment decisions. Behavioral Finance and Capital Markets reveals the main foundations underpinning neoclassical capital market and asset pricing theory, as filtered through the lens of behavioral finance. Szyszka presents and classifies many of the dynamic arguments being made in the current literature on the topic through the use of a new, ground-breaking methodology termed: the General Behavioral Asset Pricing Model (GBM). GBM describes how asset prices are influenced by various behavioral heuristics and how these prices deviate from fundamental values due to irrational behavior on the part of investors. The connection between psychological factors responsible for irrational behavior and market pricing anomalies is featured extensively throughout the text. Alternative explanations for various theoretical and empirical market puzzles - such as the 2008 U.S. financial crisis - are also discussed in a convincing and interesting manner. The book also provides interesting insights into behavioral aspects of corporate finance.

Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.