Market Activity & Volatile Price Rise Review of Literature Introduction to t

The purpose of this study was to assess the comparative explanatory validity of the efficient market hypothesis and behavioral finance theory in explaining market activity characterized by volatile price rises, reversal, and recovery. The study compared the capacity of the alternative explanations in relation to three bubble-crash-recovery episodes. The three instances of long-term price volatility and ensuing major market reversal in equity stock markets investigated were as follows:

The asset stock market bubble and major market reversal that occurred in Japan in the 1980s

The Internet IPO stock market bubble and major market reversal that occurred in the United States in 2000

The asset stock market bubble and major market reversal that occurred in Saudi Arabia in 2003 and 2004

Two research questions were investigated through the conduct of this study. The research questions investigated were as follows:

How effective is the efficient market hypothesis in explaining equity stock prices during a bubble development phase of the asset pricing phenomena characterized by long-term volatility and a subsequent market reversal?

How effective is behavioral finance theory in explaining equity stock prices during a bubble development phase of the asset pricing phenomena characterized by long-term volatility and a subsequent market reversal?

This chapter reviews background and theoretical literature related to asset bubble-crash-recovery episodes, the efficient market hypot

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ave little or no relevance to the actual conditions that are encountered by investors, the assumptions do permit the derivation of relationships between specific securities and the market as a whole (Brigham, 2000). Thus, the derived risk premium will likely be valid, although the model would not likely be successful in the derivation of a base price for the security, which, it must be added, is not the purpose of the CAPM. A procedure that permits an accurate and timely prediction of common stock prices and returns has been the focus of research by scores of academicians, economists, financial analysts, investors, and stockbrokers since the inception of equity stock markets. The development and perfection of such a procedure that predicts short-term volatility offers the potential of significant academic kudos, substantial financial rewards, and benefits for the general economy. Because of the potential rewards, the quest for such a procedure has endured over the decades. The advent of high-capacity computer-aided analysis enabled investigators to use large financial databases with greater effectiveness than was possible before this development. The ability to use massive volumes of data with computer speed, efficiency, and

Category: Economics - M