Stocks’ pricing dynamics and behavioral finance: A review

Abstract

In a brief review of the literature on stocks' pricing, the study shows that information vis-à-vis noise serves critical roles in the equilibrium process. It is dynamic in nature and there are different infiltrating aspects from the standard finance to behavioral finance points of views. The aspects of market efficiency, fundamental risk, noise traders' risk, and implementation costs make the stock markets noisy and thereby, limit the arbitrage opportunity of informed traders. Investors' psychological bases viz., belief and preferences contribute more in the equilibrium process. Beliefs include representativeness, conservativeness, and anchoring, availability biases, optimism and wishful thinking, overconfidence, and herd behavior tendency on the part of the investors. On the preferences, investors are influenced by disposition effect, prospects based on reference points, mental accounting, ambiguity aversion, and self control.The study explores the empirical literature also and reviews the six puzzles in the standard finance. Finally, the work identifies a few research gaps to be addressed in the literature.Growing Science Ltd. All rights reserved. 5

Market Microstructure Noise, Intraday Stock Market Returns, and Adaptive Learning: Indian Evidence

“…In sharp contrast, MMN includes a batch of research agenda in behavioural finance. In Sinha (2015a), MMN is generalised under a heading of "traders' psychology… and preferences" (pp. 800-805).…”