Stock Market Anomalies - Essay Example

The three P's have originated from one of the most fundamental and vital estimates of modern economics, the rationale of supply and demand. This precept submits that the price of any goods and the quantity sold are fixed by the intersection of supply and demand arcs. The intersection of these two arcs influences "equilibrium" comprising the pair of price-quantity which might satisfy both the user and the producer at the same time. How or why do markets fail Several reasons can be attached to this question.

But the simplest reason is the heterogeneity of the investors which breaks down and every capitalist starts to act in harmony which leads to either extreme optimism which is greed or pessimism which is fear. The teachings of social psychology are that people like to imitate one another thus giving weightage when being in-group rather than to an individual's own reflections. These varieties of breakdowns, even though rare, furnish investors with substantial chances to realize extra rates of return.

Random Wall TheoryAccording to Fama (1965) "weak-form efficient market hypothesis (EMH), stated that the current asset price is determined only by its historical prices (information set) of that particular asset. If the stock price failed to reject the random walk hypothesis (RWH), this implies that the future returns are unpredictable by using the information on past returns. On the other hand, if the stock prices are characterized by a mean-reverting (trend stationary) process, then there is a tendency for the price level to return to its trend path.