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Behavioral Approaches

In: ANALYSIS OF THE KOREAN STOCK MARKET Behavioral Finance Approaches

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Listed:
  • Keunsoo Kim
  • Jinho Byun

Abstract

The efficient market hypothesis does not imply that all investors are rational decision makers. Many irrational investors participate in capital markets. However, the impact of their trading on securities prices can be negligible for two reasons. First, irrational investors may be simple noise traders whose trading is not systematic. For example, some of them may irrationally buy stocks with hopes for a bull market, while others may irrationally sell them with the expectation of a bear market. As a result, the aggregated trading of these noise traders will not strongly influence stock returns. Second, rational informed arbitrageurs play an important role in eliminating price errors caused by noise traders. Since arbitrage activities wind up with profits for the arbitrageurs and losses for irrational investors, the market power of arbitrageurs will rise, thus diminishing the power of irrational investors…

Suggested Citation

  • Keunsoo Kim & Jinho Byun, 2018. "Behavioral Approaches," World Scientific Book Chapters, in: ANALYSIS OF THE KOREAN STOCK MARKET Behavioral Finance Approaches, chapter 2, pages 41-79, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813236769_0002
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    More about this item

    Keywords

    Korean Stock Market; Market Predictability; Trading Behavior; Seasonal Effect; Cross-Sectional Anomalies; Industry Analysis; History of Korean Stock Market;
    All these keywords.

    JEL classification:

    • P33 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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