Scribd Logo
Upload

Welcome to Scribd!

  • 14 views

    VasuGoyal BF Assignment

    Uploaded by

    Lenovo K8note

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    VasuGoyal BF Assignment

    Uploaded by

    Lenovo K8note
    14 views1 page

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views1 page

    VasuGoyal BF Assignment

    Uploaded by

    Lenovo K8note

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 1

    Reflective Report on Financial Models and Market Efficiency

    This report states that financial models, specifically the Capital Asset Pricing Model (CAPM) and the Efficient
    Market Hypothesis (EMH), have evolved over time, with both strengths and limitations. In the early days of
    finance, many studies supported the notion that markets were efficient, meaning that prices fully reflected all
    available information. However, anomalies like the post-earnings-announcement drift posed challenges to this
    idea, suggesting that stock prices could behave unpredictably. As researchers delved further, they found
    inconsistencies in other areas, such as fixed income and currency markets, where factors like interest rates
    seemed to predict returns—contradicting the efficient market theory.

    A clear distinction between short-term and long-term price movements emerged, highlighted by Robert
    Shiller’s work, which demonstrated that stock prices often fluctuated more than underlying dividends could
    justify. This finding led to discussions about how risk premiums can vary over time and how investor behavior
    influences market dynamics. Some economists argued that emotions could shape investment choices, causing
    more cautious behavior during downturns and excessive optimism during market booms.

    Additionally, return anomalies such as the value premium and momentum effect showed that not all stocks
    behaved as CAPM predicted. While CAPM centers on systematic risk (represented by beta), researchers
    discovered that factors like size and value also played essential roles in stock performance. Momentum—a
    pattern where stocks that have been rising continue to do so—remains difficult to explain through rational
    models alone, indicating that investor psychology may be influential.

    In finance, ongoing debates about market efficiency, investor psychology, and the development of new models
    continue to shape our understanding of markets. Economists increasingly recognize a blend of rational
    decision-making and behavioral influences, aiming to create models that better capture real market phenomena.
    Although CAPM is still widely used, its limitations spur the development of alternative models. The journey to
    refine financial understanding is ongoing, as researchers work to create frameworks that capture the
    complexities of market behavior while remaining applicable to real-world scenarios.

    You might also like