BEHAVIOURAL FINANCE AND MARKET EFFICIENCY Essay

BEHAVIOURAL FINANCE AND MARKET EFFICIENCY - Essay Example Due to the presence of inefficiency within the global market, the sales and profitability of a company is not only affected but also the country’s ability to build a more reliable capital asset. Therefore, in response to poor market efficiency, the study on behavioural finance has gained importance back in 1990s2. Using knowledge on behavioural finance, the main causes and underlying drivers of the most recent global financial crisis will be identified and tackled in details. As part of analyzing the factors that has triggered the recent global financial crisis, both behavioural and non-behavioural explanation behind such crisis will be compared and contrast. In relation to the presence of irregularities in the global markets, whether or not â€Å"value† is riskier than â€Å"growth† will be answered based on the theory behind the rational risk pricing. 2. Main Causes and Underlying Drivers of the Most Recent Global Financial Crisis 2.1 Non-behavioural Explanatio n behind the Most Recent Global Financial Crisis Next to the Great Depression which occurred back in 1930s, the worst global financial crisis happened between 2007 to 2008 when most of the large-scale financial institutions worldwide were at risks of bankruptcy aside from the sudden fall in the stock markets3. Specifically the U.S. real estate bubble in 2006 had caused serious damages to the status of global financial institutions4, 5. Eventually, the prolonged 2007 to 2008 global financial crisis has somehow contributed to the European sovereign-debt crisis6, 7. This increases the risks wherein most of the largest financial institutions such as the Lehman Brothers had serious problems about their liquidity and bank solvency8. Based on the study of macroeconomics, a lot of potential factors have been considered to be the main drivers behind the most recent global financial crisis. Based on the historical trend in the global financial crisis, one thing that is certain is that increas e in financial imbalances within the world market has something to do with today’s global financial crisis9. Likewise, it is also suspected that the growing imbalances in the worldwide capital flows are one of the main reasons behind the recent global financial crisis10, 11, 12, 13. Furthermore, it is also possible that the combination of the increasing imbalances in the flow of capital worldwide and the use of monetary policies have contributed to the development of the recent global financial crisis14, 15. Financial crisis is often characterized by having relatively low levels of national savings, huge fiscal and financial deficits, business bankruptcy and foreclosure, low GDP output, high unemployment rate, and huge trade or current account deficits16. With regards to the continuously increasing global financial imbalances, Merrouche and Nier (2010) explained that the incidence of global financial imbalances is somehow strongly connected with the huge dispersion between a huge net capital flows between two or more different countries and the position of the current account across different countries17. In line with this, a country with excessive inflows of capital can have long-term low interest rates which can influence most investors to search for other investment options as most financial institutions would try other means of maintaining their daily operational costs18, 19. Likewise, excessively high inflows of capital can also significantly reduce the wholesale funding cost of the