Market Efficiency and Behavioral Finance

This course deals with the theories relating efficiency of securities market in securities price formation, and possible interference of human psychology in the price formation process. The course will begin with explanation of market efficiency, and its taxonomy; then the efficient market hypothesis will be explained – the concept which advocates that securities markets are always and already efficient to form fair prices of financial assets. Thereafter the evidences inconsistent with the efficient market hypothesis will be examined in the form of market anomalies. Next part of the course is behavioral finance – the notion elucidating the impact of human psychology in financial decisions. In this respect, the course will explain behavioral biases and other cognitive forces affecting human de cisions, and their implications in finance in general, and in particular, securities prices. Course Learning Outcomes On completion of this course the students will be able to: Define market efficiency, and explain the taxonomy of market efficiency; Describe efficient market hypothesis, and outline the implications of efficient market hypothesis in securities analysis and investment strategy formulation; Demonstrate competency in testing efficient market hypothesis, and interpreting the results; Identify market anomalies, and make use of identified anomalies to predict securities returns; Define behavioral finance, and explain how behavioral finance relates to the efficient market hypothesis; Explain how behavioral biases and other cognitive forces aff ect financial practitioners’ decisions; Explain the implications of behavioral finance in personal and corporate financial decisions, and illustrate how behavioral finance complements traditional finance.

This course aims to acquaint students with two contemporary paradigms of asset pricing - the notion of informational efficiency which claims that securities markets are free from frictions, are efficient, and securities prices accurately reflect all the relevant information; and behavioral finance theory which prescribes to consider human cognitive forces as friction in securities price formation process. The course will help students to develop knowhow to critically analyze these controversies, and to take into account the implications of these concepts while making investment decisions. Course Description This course deals with the theories relating efficiency of securities market in securities price formation, and possible interference of human psychology in the price formation process. The course will begin with explanation of market efficiency, and its taxonomy; then the efficient market hypothesis will be explained – the concept which advocates that securities markets are always and already efficient to form fair prices of financial assets. Thereafter the evidences inconsistent with the efficient market hypothesis will be examined in the form of market anomalies. Next part of the course is behavioral finance – the notion elucidating the impact of human psychology in financial decisions. In this respect, the course will explain behavioral biases and other cognitive forces affecting human de cisions, and their implications in finance in general, and in particular, securities prices. Course Learning Outcomes On completion of this course the students will be able to: Define market efficiency, and explain the taxonomy of market efficiency; Describe efficient market hypothesis, and outline the implications of efficient market hypothesis in securities analysis and investment strategy formulation; Demonstrate competency in testing efficient market hypothesis, and interpreting the results; Identify market anomalies, and make use of identified anomalies to predict securities returns; Define behavioral finance, and explain how behavioral finance relates to the efficient market hypothesis; Explain how behavioral biases and other cognitive forces aff ect financial practitioners’ decisions; Explain the implications of behavioral finance in personal and corporate financial decisions, and illustrate how behavioral finance complements traditional finance.