The modern finance theory is based on the capital asset pricing model

Abstract
As some anomalies are hardly explained by the traditional finance, the behaviour finance is introduced. It was first introduced by Kahneman and Tversky (1979), which they presented the prospect theory. In fact, investors’ behaviour often violates the expected utility theory, some of them trade irrrationally. Then Shefrin and Statman (1994) base on the CAPM, and put investor sentiment into the model to make the BAPM. They thought noise traders and information traders would interact and influenced the price setting, including the noise traders’ behaviour in the BAPM let the asset pricing more precise. Another important theory is the behavioral portfolio theory. The theory states that when investors choose portfolios, they on the one hand want to be security, while on the other hand they potentially also want to reach aspiration levels. So it lets BPT investors to choose bonds and lottery tickets together come true. According to these phenomenon which happen to investors’ portfolio selection, many researchers give their explaination. Generally speaking, bahaviour finance is based on two theories, which is limits of arbitrage and investor sentiment. DSSW model is based on the former theory while BSW model, DHS model and HS model are based on the latter one. There are also some more models in the behaviour finance area. These models can explain some anomalies, such as Closed-end fund puzzle and the equity premium puzzle. In this paper these two anomalies would be treated as examples to explain how behaviour finance explain these anomalies.
Introduction

The modern finance theory is based on the capital asset pricing model (CAPM), Markowitz’s Portfolio Theory, Arbitrage Pricing Theory (APT). The model CAPM is introduced by Sharpe (1964), Lintner (1965), and Black (1972). It provides the pricing mechanism of capital assets and the decision factor of risk is?(the relationship between firm returns and market returns). These theories are based on the Efficiency market hypothesis (EMH) and the CAPM can be used to test the EMH.
While its analysis framework confined within the scope of rational analysis, when more and more anomalies arise in the market, they are hard to be explained by standard finance which is based on the EMH. In this situation, the questioning of modern finance beginned when the prospect theory is introduced by Kahneman and Tversky (1979). And then the behavioural finance is introduced to explain these snomalies. The definition of behavioural finance is that
“Behavioural finance- that is, finance from a broader social science perspective including psychology and sociology- is now one of the most vital research programs, and it stands in sharp contradiction to much of efficient markets theory.” (Shiller, 2003 p83)
It is a Marginal subject and opposite to the traditional finance, and it tries to explain the importance of investors’ emotion and mental mistakes, which would influence their decision-making process (Ricciardi and Simon, 2000). At first, behaviour finance is marginalized as “ anomalies literature” (Frankfurter and McGoun, 2000).it has been researched for a long time, and then it has been accepted after more and more journals focusing on the discussion of anomalies.
Section 2 of the paper explains three main theories of behaviour finance, which are prospect theory, behavioural capital asset pricing theory and behavioral portfolio theory. Section 3 presents some models which provided by the behaviour finance. Section 4 discusses the application of behaviour finance to explain anomalies. Section 6 concludes.
Theory

Order a unique copy of this paper
(550 words)

Approximate price: $22

Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

At Solution Essays, we are determined to deliver high-quality papers to our clients at a fair price. To ensure this happens effectively, we have developed 5 beneficial guarantees. This guarantees will ensure you enjoy using our website which is secure and easy to use.

Money-back guarantee

Most companies do not offer a money-back guarantee but with Solution Essays, it’s either a quality paper or your money back. Our customers are assured of high-quality papers and thus there are very rare cases of refund requests due to quality concern.

Read more

Zero-plagiarism guarantee

All our papers are written from scratch and according to your specific paper instructions. This minimizes any chance of plagiarism. The papers are also passed through a plagiarism-detecting software thus ruling out any chance of plagiarism.

Read more

Free-revision policy

We offer free revisions in all orders delivered as long as there is no alteration in the initial order instruction. We will revise your paper until you are fully satisfied with the order delivered to you.

Read more

Privacy policy

All data on our website is stored as per international data protection rules. This ensures that any personal data you share with us is stored safely. We never share your personal data with third parties without your consent.

Read more

Fair-cooperation guarantee

Ordering and sending money to us is an indication that you are purchasing our products and services. To have business talks laid out in the official language, you can check on our terms and conditions and get more information about this.

Read more

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Order your essay today and save 30% with the discount code: LEMONADEPlace Order