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Competing Theories of Financial Anomalies

32 Pages Posted: 25 Jan 2000  

Alon Brav

Duke University - Fuqua School of Business

J.B. Heaton

Conjecture LLC; J.B. Heaton, P.C.

Multiple version iconThere are 2 versions of this paper

Date Written: April 2001

Abstract

We compare two competing theories of financial anomalies: (1) behavioral theories built on investor irrationality; and (2) rational structural uncertainty theories built on incomplete information about the structure of the economic environment. We find that although the theories relax opposite assumptions of the rational expectations ideal, their mathematical and predictive similarities make them difficult to distinguish. Interestingly, even if irrationality generates financial anomalies, their disappearance still may hinge on rational learning ? that is, on the ability of rational arbitrageurs and their investors to reject competing rational explanations for observed price patterns.

JEL Classification: G12, G14, G18

Suggested Citation

Brav, Alon and Heaton, J.B., Competing Theories of Financial Anomalies (April 2001). Eleventh Annual Utah Winter Conference. Available at SSRN: https://ssrn.com/abstract=204330 or http://dx.doi.org/10.2139/ssrn.204330

Alon Brav (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
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J.B. Heaton

Conjecture LLC

221 North LaSalle Street
38th Floor East
Chicago, IL 60601
United States

HOME PAGE: http://conjecturellc.com

J.B. Heaton, P.C. ( email )

221 North LaSalle Street
38th Floor East
Chicago, IL 60601
United States

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