The main assumptions of the capital market theory are as follows: All Investors are Efficient Investors - Investors follow Markowitz idea of the efficient frontier and choose to invest in portfolios along the frontier. The Time Horizon is equal for All Investors - When choosing investments, investors have equal time horizons for the choseninvestments.
There are different ways how market efficiency can be achieved. The most famous include: However, it has been shown that letting the market to work on its own does not always lead to desirable outcomes.
Efficiency and equilibrium in competitive markets Market efficiency can be achieved in competitive market by using demand and supply curve. The intersection of the demand and supply curve is the point where market equilibrium occurs. This situation implies that marginal benefit equals marginal cost, what is a necessary circumstance for economic efficiency.
Pareto efficiency Another way how to judge the extent of government intervention is provided by Pareto efficiency. Marginal social benefit represents only one particular change that induces a gain to society, while the marginal social costs stands for the cost of the change.
Consequently, there is a market efficiency because if any change occurs it does not induce any net gain. There are three main core conditions for Pareto efficiency which are also useful for analysis of economic efficiency: Exchange efficiency[ edit ] All the produced goods ought to be distributed to the individuals for whom they are most valuable.
Consequently, there does not occur a situation where trade or exchange could make two individuals better off. Trade is feasible when marginal rate of substitution of two individuals differs.
However, in the case of exchange efficiency, the same marginal rate of substitution for all individuals is required. For competitive markets to reach exchange efficiency, each individual is supposed to always face the same price.
To analyze production efficiency of any economy, there are usually used isocost and isoquants lines. Production efficiency is reached in competitive markets when firms face the same price. Thus, for market to be efficient, we need to take into account individuals' preferences and what is technically possible.
Analysis is feasible using the production possibilities schedule which should lead to the highest level of utility. Utility can be achieved when the indifference curve and the production possibilities schedule are tangent. In the case of product mix efficiency it is expected that marginal rate of substitution is equal to the marginal rate of transformation where the marginal rate of transformation expresses the slope of the production possibilities schedule.
It is common for competitive market to have product mix efficiency. Data from different twenty-year periods is color-coded as shown in the key. See also ten-year returns. Shiller states that this plot "confirms that long-term investors—investors who commit their money to an investment for ten full years—did do well when prices were low relative to earnings at the beginning of the ten years.
Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low.
Behavioral economists attribute the imperfections in financial markets to a combination of cognitive biases such as overconfidenceoverreaction, representative bias, information biasand various other predictable human errors in reasoning and information processing.
These errors in reasoning lead most investors to avoid value stocks and buy growth stocks at expensive prices, which allow those who reason correctly to profit from bargains in neglected value stocks and the overreacted selling of growth stocks.
Daniel Kahneman Behavioral psychology approaches to stock market trading are among some of the more promising[ citation needed ] alternatives to EMH and some[ which? But Nobel Laureate co-founder of the programme Daniel Kahneman —announced his skepticism of investors beating the market: It's just not going to happen.
For example, one prominent finding in Behaviorial Finance is that individuals employ hyperbolic discounting. It is demonstrably true that bondsmortgagesannuities and other similar financial instruments subject to competitive market forces do not.
Any manifestation of hyperbolic discounting in the pricing of these obligations would invite arbitrage thereby quickly eliminating any vestige of individual biases. Similarly, diversificationderivative securities and other hedging strategies assuage if not eliminate potential mispricings from the severe risk-intolerance loss aversion of individuals underscored by behavioral finance.
On the other hand, economists, behaviorial psychologists and mutual fund managers are drawn from the human population and are therefore subject to the biases that behavioralists showcase. By contrast, the price signals in markets are far less subject to individual biases highlighted by the Behavioral Finance programme.
Richard Thaler has started a fund based on his research on cognitive biases. In a report he identified complexity and herd behavior as central to the global financial crisis of Additionally the concept of liquidity is a critical component to capturing "inefficiencies" in tests for abnormal returns.Benefits and Importance of Social Capital The importance of social capital theory is apparent from the literature with many empirical studies that purport to show the importance of social capital to a very wide-ranging set of socioeconomic phenomena (Durlauf a  ; Krishna ).
Capital markets in developing countries Œ A model for capital market diagnostics, with a field study Capital Market Diagnostic), romelic SesaZlebelia gamoyenebul iqnas ensuring the practical relevance of the thesis to providing material and further contacts for our research.
Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded.
Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting.
The efficient markets theory (EMT) explains that all relevant information about the intrinsic value of an asset is reflected in the price of that asset (Dimson and Mussavian ).
Hence, this theory assumes that the financial markets tend to be efficient in information. The capital market theory builds upon the Markowitz portfolio model.
The main assumptions of the capital market theory are as follows: All Investors are Efficient Investors - Investors follow. Capital market theory is a positive theory in that it hypothesis how investors do behave rather than, how investors should behave, as, in the case of Modem Portfolio Theory (MPT).