Psychological Causes of Financial Market Cycles and Their Effects on Market Efficiency

Abstract:     
This research utilizes the most recent research in psychology to analyze causes of financial cycles within the context of applied financial theory. Such cycles are shown to be consistent with both human nature and efficient markets, but they are also demonstrated to contribute to mispricing in inefficient markets. Technical analysis, which may pick up some of the resulting price patterns, can be enhanced by the full structural framework created in this research. This foundation includes a simple mathematical model of the optimal trading strategies of arbitrators seeking to maximize profits from security mispricings.

Number of Pages in PDF File: 41

Keywords: Financial Cycle, Psychology, Efficient Market, Technical Analysis, Arbitrage

JEL Classification: G1

working papers series