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

41 Pages Posted: 24 May 2010

See all articles by Austin Murphy

Austin Murphy

Oakland University - School of Business Administration

Date Written: May 24, 2010

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.

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

JEL Classification: G1

Suggested Citation

Murphy, J. Austin, Psychological Causes of Financial Market Cycles and Their Effects on Market Efficiency (May 24, 2010). Available at SSRN: https://ssrn.com/abstract=1615109 or http://dx.doi.org/10.2139/ssrn.1615109

J. Austin Murphy (Contact Author)

Oakland University - School of Business Administration ( email )

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Rochester, MI 48309-4401
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