Competing Theories of Financial Anomalies

The Review of Financial Studies, v 15 n 2 2002

32 Pages Posted: 25 Jan 2000 Last revised: 18 Feb 2019

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business

J.B. Heaton

J.B. Heaton, P.C.

Date Written: April 1, 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 1, 2001). The Review of Financial Studies, v 15 n 2 2002. 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
919-660-2908 (Phone)
919-684-2818 (Fax)

J.B. Heaton

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

Chicago, IL
United States
(312) 487-2600 (Phone)

HOME PAGE: http://jbheaton.com

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