Arbitraging the Anomalies
Posted: 25 Sep 2015
Date Written: September 20, 2015
In finance, arbitrage is an essential framework to understand asset pricing. However, the study of anomalies also called as premiums, which are not arbitrageable has led to a debate regarding whether markets are efficient in correcting price imbalances or is inefficiency a reality. This is why the Economics Nobel prize 2013 was awarded to both the behavioral and fundamental school. This paper explains the circular argument between the three schools of thought. The Fama school which uses factors to explain asset performance, the behavioral school which is focused on psychological biases and the old Beta school which thinks the arguments of value vs. growth are all fleeting.
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