Research Paper (undergraduate) from the year 2010 in the subject
Business economics - General, grade: 1,3, University of Applied Sciences
Northwestern Switzerland, language: English, abstract: The Efficient
market hypothesis can be considered as part of rational economics but it
does not specify at all how individuals should or will act. Therefore it
might be a useful model of the functioning of the market as a whole but
it does not explain the behaviors of investors as well as managers and
other participants. While the Efficient market hypothesis deals as a
basis for understanding the normal working of the markets, from time to
time it might happen that the market as a whole or an individual stock
may act irrationally. Such behavior is well known and generally occurs
when the market price of a share turns away from its intrinsic value.
The result is what commonly is called a bubble. This term is often used
but the reasons for the occurrence are quite unclear. In fact, at the
same time as the market as a whole has become more efficient, instances
of irrationality have become more common or at least appear to be.
Therefore we try to discuss the question why capital markets, which are
considered as efficient and perfect in theory, are volatile and
imperfect in reality. The paper responds to this question by discussing
mainly the irrational behavior of people by turning into the field of
psychology. Furthermore it seeks for approaches of explanation conducted
by different investment strategies containing among others an increased
use of derivative instruments or single trades based on massive capacity
which therefore influence prices. Methodology and Structure of the paper
In general the paper can be divided in 3 parts, a theoretical as well as
an analytical one and a final point the Conclusion (Part C) which sums
up the basic findings of the paper. Whereas Part A can be regarded as
delivering the theoretical background, Part B contains the empirical
analysis b