Behavioral Finance - Asset Prices Predictability, Equity Premium Puzzle, Volatility Puzzle: The Rational Finance Approach

30 Pages Posted: 2 Mar 2020

See all articles by Svetlozar T. Rachev

Svetlozar T. Rachev

Texas Tech University

Stoyan V. Stoyanov

Charles Schwab

Stefan Mittnik

Ludwig Maximilian University of Munich (LMU)

Frank J. Fabozzi

EDHEC Business School

Abootaleb Shirvani

Texas Tech University - Department of Mathematics and Statistics

Date Written: February 4, 2020

Abstract

In this paper we address three main objections of behavioral finance to the theory of rational finance, considered as “anomalies” the theory of rational finance cannot explain: (i) Predictability of asset returns; (ii) The Equity Premium; (iii) The Volatility Puzzle. We offer resolutions of those objections within the rational finance. We do not claim that those are the only possible explanations of the “anomalies”, but offer statistical models within the rational theory of finance which can be used without relying on behavioral finance assumptions when searching for explanations of those “anomalies”.

Keywords: Behavioral Finance, Rational Finance

JEL Classification: C10, C58, G02, G12, G14

Suggested Citation

Rachev, Svetlozar T. and Stoyanov, Stoyan Veselinov and Mittnik, Stefan and Fabozzi, Frank J. and Shirvani, Abootaleb, Behavioral Finance - Asset Prices Predictability, Equity Premium Puzzle, Volatility Puzzle: The Rational Finance Approach (February 4, 2020). Available at SSRN: https://ssrn.com/abstract=3531387 or http://dx.doi.org/10.2139/ssrn.3531387

Svetlozar T. Rachev

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Stoyan Veselinov Stoyanov

Charles Schwab ( email )

101 Montgomery Street (120K-15)
San Francisco, CA 94104
United States

Stefan Mittnik

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Abootaleb Shirvani (Contact Author)

Texas Tech University - Department of Mathematics and Statistics ( email )

Lubbock, TX 79409-1042
United States

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