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A review paper on behavioral finance: study of emerging trends

Aditya Sharma (Department of Economics and Finance, Birla Institute of Technology and Science, Pilani, Rajasthan, India)
Arya Kumar (Department of Economics and Finance, Birla Institute of Technology and Science, Pilani, Rajasthan, India)

Qualitative Research in Financial Markets

ISSN: 1755-4179

Article publication date: 31 May 2019

Issue publication date: 24 April 2020

2784

Abstract

Purpose

This paper participates in the debate on market efficiency and correct approach for asset pricing through a comprehensive review of literature in favor, as well as against the long held belief of market efficiency. The purpose of this paper is to understand emerging trends in behavioral finance and establish its future potential as a mainstream alternative theory of asset pricing.

Design/methodology/approach

The review and discussion of literature is mainly divided into three different sections that are –theories supporting efficient market hypothesis (EMH); studies providing evidences from the stock market on the failure of EMH and studies on behavioral finance, discussing separately investors’ behavioral biases keeping in mind their effect on stock prices; and providing empirical evidences on the effect of investor sentiment on stock prices.

Findings

The review of literature from both the point of views has helped in understanding the market efficiency issue and changing dynamics of asset pricing approach. This is achieved by highlighting the gaps in the concept of market efficiency and also suggesting how these gaps can be bridged with a superior approach such as behavioral finance. Through further discussion of emerging trends in behavioral finance, the paper also points out gaps and how these can be abridged, for behavioral finance to be accepted as a mainstream alternative approach to EMH.

Originality/value

This is an extensive and one of a kind study that discusses market efficiency through discussion of EMH and behavioral finance side by side. With the help of such a study, researchers can precisely understand the need and can focus on the future course of action to make behavioral finance a mainstream approach to asset pricing.

Keywords

Citation

Sharma, A. and Kumar, A. (2020), "A review paper on behavioral finance: study of emerging trends", Qualitative Research in Financial Markets, Vol. 12 No. 2, pp. 137-157. https://doi.org/10.1108/QRFM-06-2017-0050

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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