Efficient Markets and Behavioral Finance: A Comprehensive Multifractional Model

Abstract

Real-world financial dynamics daily do challenge the credibility of the Efficient Market Hypothesis, the pillar of the whole martingale-based modern financial theory stating that at any time asset prices discount all past information. As a matter of fact, the empirical evidence accumulated so far indicates that current models cannot explain the complexity of financial market movements, to the extent that a strand of skeptical thought, the Behavioral Finance, has been booming. The question whether a model exists which is able to make consistent the two paradigms is a living matter that financial markets demand to address. The paper deals with a parsimonious stochastic model able to include as special cases both market efficiency and "psychological" phenomena such as the underreaction and the overreaction, peculiar features of the behavioral finance. The great readability of the model, its capability to agree the controversial results provided by literature on efficient markets and the simplicity of the financial intuition it offers are discussed.

Does Financial Behavior Mediate The Relationship Between Financial Literacy and Financial Experience Towards Financial Performance of Small Businesses?

“…SME owners who have a high level of literacy will have better financial behavior. These findings are consistent with the study of (Arifin, 2017;Bianchi et al, 2015;Kumar, Suresh;Watung, Christalita;N. Eunike, Josephine;Luinata, 2017;Lusardi et al, 2017;Sayinzoga et al, 2016;Strömbäck et al, 2017;Tang & Baker, 2016;Thi et al, 2015).…”

“…They show that inequalities in financial literacy are the main determinants of income disparity because they increase differences in wealth accumulation patterns. Bianchi, Pantanella, & Pianese (2015) found that financial literacy affects household portfolio selection and return rates. The same results are shown in the research of Kumar, Suresh, Watung, Christalita; N. Eunike, Josephine; Luinata (2017), who found evidence that financial literacy affected financial behavior.…”

Behavioural Aspects of the Financial Decision-Making

“…The research of Yu and Zheng (2015) shows, investors do not always adopt rational behaviour as the traditional finance theory assumed but make many irrational decisions based on individual cognitive and prejudices. In addition, the fact that the traditional model cannot explain the complexity of financial market movements makes the field of behavioural finance boom (Bianchi et al, 2015). Some authors even indicate the shift from behavioural finance to social finance, which studies the structure of social interactions, how financial ideas spread and evolve and how social processes affect financial outcomes (Hirshleifer, 2015).…”

Capital structure construct: a new approach to behavioral finance

“…This paper seeks to determine the dimensions underlying those variables observed in the construct of the capital structure, establishing systematic relations among the variables to assess cognitive behaviors and to establish their relationship to financial theory. Interpreting the theory of capital structure at a construct level 4 The concept of the WACC is commonly accepted but there are a number of different models and formulae that can be used to estimate this cost, for example, the "real WACC" and the "nominal WACC". The real WACC excludes inflation from the calculated return and is applied to a regulatory asset base that is indexed by inflation.…”