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Till relatively recently, the standard story in Financial Economics went like this. Financial markets can be analyzed by assuming that rational individual investors construct portfolios. If those investors have standard risk profiles they will chose mean-variance portfolios. In a recent paper, Markowitz actually analyzes the necessary and sufficient conditions for the mean-variance approach to apply.
In that framework, markets are efficient and prices rapidly reflect information. Following Kahneman’s Nobel Prize, this rational asset pricing framework became questioned leading to the field called Behavioral Finance and recently to a new Nobel Price by Thaler. Lately, a synthesis is emerging based with the idea of and the Adaptive Market Hypothesis (Lo (2017)). In a...
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