Behavioural asset pricing and efficient markets

Dennis Venunye Hehetror and Sunil Kumar Bundoo

Chapter 16 in The Elgar Companion to Financial Economics, 2025, pp 292-303 from Edward Elgar Publishing

Abstract: Behavioural asset pricing and efficient markets are two philosophies in finance, both providing distinct insights into how financial markets function and how investors make choices. Efficient markets theory, which has its origins in traditional finance, asserts that asset prices comprehensively incorporate all accessible information and investors’ behaviours. Behavioural asset pricing delves into the complex dynamics that exist between financial markets and human psychology, recognising that investor conduct is not invariably rational or efficient. This discipline endeavours to augment our understanding of market dynamics and make a valuable contribution to the advancement of more realistic and comprehensive financial models through the comprehension of these behavioural nuances. The purpose of this chapter is to contribute to and enhance our understanding of how investor behaviour affects the financial market and asset pricing. The issues covered in this chapter are: Introduction to Behavioural Asset Pricing and Efficient Markets; Asset Pricing Model; Behavioural and Standard Rationales; Behavioural Investment Asset Pricing Model; Efficient Market Information; Hard to Beat Market; and Joint Hypothesis: Market Efficiency, Asset Pricing, and “Smart Beta”.

Keywords: Behavioural finance; Behavioural asset pricing; Efficient markets (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035341399
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