Behavioral Finance -- Asset Prices Predictability, Equity Premium Puzzle, Volatility Puzzle: The Rational Finance Approach
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: Predictability of asset returns, The Equity Premium, (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.
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