Essays on Behavioural Finance - Australian Stock Market and Efficient Markets Approach Literature review

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The paper “ Behavioural Finance - Australian Stock Market and Efficient Markets Approach” is a good variant of the literature review on finance & accounting. Behavioral finance argues that some financial phenomena can plausibly be understood using models in which some agents are not fully rational. The field has two building blocks: limits to arbitrage, which argues that it can be difficult for rational traders to undo the dislocations caused by less rational traders; and psychology, which catalogs the kinds of deviations from full rationality we might expect to see.

The behaviorist view suggests that the stock market is inefficient and it is possible to outperform the market. The theory assumes investors are irrational and future share price movements are forecasting by using historical movements. Therefore investors can outsmart the market by analyzing trends and financial reports. Financial markets characterize by many entities that interact and affect each other in the trading process. In this context, there are two different approaches to stock pricing: efficient markets (EM) and noise trading (NT). Each approach implements different scenarios that lead to different results. Australian Stock MarketThe share market in Australia has two main functions.

Firstly, it provides a link so that listed companies can receive equity funds to expand their operations and so that the people with the funds can invest and receive the return in capital gains and dividends income. Secondly, it provides a market place where buyers and sellers can come together for the trading of shares and other securities at the current market price which has been determined by the forces of supply and demand. When there is competition in the stock market and the number of investors is the same, the competition for the supply and demand of shares is manipulated.

(Steve Lumby & Chris Jones, 1999, 178) For a company to be successful in completing it will need to make itself more desirable and attractive for investors. This will usually mean higher dividends are paid out to the investors, so as to encourage further investment. As the company increases its supply of shares through afloat, the price mechanism will adjust the price and set a new equilibrium to help the company compete in a competitive stock market.

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Steve Lumby & Chris Jones. (1999: 6th Ed.). Investment Appraisal & Financial Decisions. London: International Thomson Business Press. 177-79

Thaler, R (1999), The End of Behavioural Finance, Financial Analysts Journal, November-December, 12-17

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