The Investigation into the Extent of Investors Irrationality Based on GARCH-M Model

Abstract

Research in risk preference suggests that, in violation of economic man hypothesis, most investors are economically irrational, which is reflected through the phenomenon of preference reversal. However, there is a scant of study to measure the extent how irrational individuals are. Inspired by the way how efficient market is defined, this paper proposes a measurement of preference reversal and divides irrationality into two types. Furthermore, based on the data of market index and GARCH-M model, this paper finds that risk preference inconsistency always exists and investors in smooth time are weakly irrational.