EFFICIENT MARKETS AND BEHAVIORAL FINANCE: A COMPREHENSIVE MULTIFRACTIONAL MODEL

Abstract

Real-world financial dynamics daily do challenge the credibility of the Efficient Market Hypothesis, the pillar of the whole martingale-based modern financial theory stating that at any time asset prices discount all past information. As a matter of fact, the empirical evidence accumulated so far indicates that current models cannot explain the complexity of financial market movements, to the extent that a strand of skeptical thought, the Behavioral Finance, has been booming. The question whether a model exists which is able to make consistent the two paradigms is a living matter that financial markets demand to address. The paper deals with a parsimonious stochastic model able to include as special cases both market efficiency and "psychological" phenomena such as the underreaction and the overreaction, peculiar features of the behavioral finance. The great readability of the model, its capability to agree the controversial results provided by literature on efficient markets and the simplicity of the financial intuition it offers are discussed.