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Competing Theories of Financial Anomalies

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Author Info
Alon Brav (Duke University)
J.B. Heaton (Bartlit Beck Herman Palenchar & Scott and Duke University)
Abstract

We compare two competing theories of financial anomalies: "behavioral" theories built on investor irrationality, and "rational structural uncertainty" theories built on incomplete information about the structure of the economic environment. We find that although the theories relax opposite assumptions of the rational expectations ideal, their mathematical and predictive similarities make them difficult to distinguish. Even if irrationality generates financial anomalies, their disappearance still may hinge on rational learning--that is, on the ability of rational arbitrageurs and their investors to reject competing rational explanations for observed price patterns. Copyright 2002, Oxford University Press.

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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 15 (2002)
Issue (Month): 2 (March)
Pages: 575-606
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Handle: RePEc:oup:rfinst:v:15:y:2002:i:2:p:575-606

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  2. Larry Epstein, 2005. "An Axiomatic Model of Non-Bayesian Updating," RCER Working Papers 521, University of Rochester - Center for Economic Research (RCER). [Downloadable!]
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  3. William N. Goetzmann & Massimo Massa, 2003. "Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias," NBER Working Papers 9499, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Larry Epstein & Martin Schneider, 2002. "Learning Under Ambiguity," RCER Working Papers 497, University of Rochester - Center for Economic Research (RCER), revised Mar 2005. [Downloadable!]
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  5. George M. Constantinides, 2002. "Rational Asset Prices," NBER Working Papers 8826, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Kevin J. Lansing, 2005. "Lock-in of extrapolative expectations in an asset pricing model," Working Papers in Applied Economic Theory 2004-06, Federal Reserve Bank of San Francisco. [Downloadable!]
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  7. Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2003. "Accounting Anomalies and Information Uncertainty," SIFR Research Report Series 13, Institute for Financial Research. [Downloadable!]
  8. Murillo Campello & Long Chen & Lu Zhang, 2005. "Expected Returns, Yield Spreads, and Asset Pricing Tests," NBER Working Papers 11323, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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