Title: Asymmetry in market efficiency across economic states: explanation and implication

Authors: Yacine Hammami

Addresses: Department of Finance, University of Tunis, ISG Tunis, 41, Rue de la Liberté, Cité Bouchoucha 2000, Le Bardo, Tunisia

Abstract: The empirical financial literature has recently suggested that the US stock market might be efficient in bad times and inefficient in good times. This article explains why some psychological phenomena such as wishful thinking, overconfidence and the house money effect might cause deviations from full rationality principally in good times and not in bad times. Furthermore, this article gives several reasons why the arbitrage process might be effective in bad times and limited in good times. These results are important both for policymakers and for portfolio management.

Keywords: market efficiency; overreaction; investor psychology; arbitrage limits; stock markets; asymmetry; wishful thinking; overconfidence; house money effect; rationality; bad times; good times; policy making; portfolio management.

DOI: 10.1504/IJBAF.2012.052190

International Journal of Behavioural Accounting and Finance, 2012 Vol.3 No.3/4, pp.270 - 279

Accepted: 16 Dec 2012
Published online: 10 Apr 2015 *

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