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Competing Theories of Financial Anomalies

Competing Theories of Financial Anomalies 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

Competing Theories of Financial Anomalies

The Review of Financial Studies , Volume 15 (2) – Jan 2, 2002

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Publisher
Oxford University Press
Copyright
Copyright The Society for Financial Studies 2002
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/15.2.575
Publisher site
See Article on Publisher Site

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.

Journal

The Review of Financial StudiesOxford University Press

Published: Jan 2, 2002

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