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1. Introduction
During the past three decades, a debate on the efficiency of stock markets has attracted the attention of almost all the researchers who are studying stock returns and movement of returns. Concept of efficient stock markets dates back to the late 1960s when Eugene F. Fama (1970) proposed efficient market hypothesis (EMH). EMH as a framework of efficient markets and rational investors was based upon expected utility theory, which had soon become widely accepted and is still being followed for asset pricing decisions. Even though the framework was accepted widely across researchers, it failed to explain some unexpected phenomena that had occurred in stock markets namely, internet bubble of the late 1990s and the recession of 2008. Also, with the increased number of individual investors, the stock returns have shown a tendency to defy the framework and get diverted from their fundamental values. Some of the researchers studying stock market behavior of recent times challenge this traditional framework and resort to behavioral finance as a more reasonable explanation of the stock returns and the unexpected phenomena, such as bubble and recession, occurring in stock markets. Researchers supporting behavioral finance framework reject the expected utility theory and accept that stock markets are inefficient systems and investors, who constitute these systems, are irrational and biased as evidenced from experiments on agents in both controlled and real-life situations (Starmer, 2000). Behavioral finance framework is relatively naïve and is not matured enough (in terms of empirical and theoretical research) to be accepted as an alternative theory in market contexts to EMH. Though the prospect theory introduced by Starmer and Sugden (1989) and Tversky and Kahneman (1992) has come a long way to be considered widely as an alternative and in fact superior theory to expected utility theory.
EMH promotes efficient nature of stock markets by assuming that stock markets are a simple and efficient system with macroeconomic fundamentals governing all the price movements. The prices reflect all the available information and investors make their investment decisions based on these information. The only kind of profit that exists in the stock markets is compensation for the informed risk taken up by the investors. EMH has a limitation to capture events such as the 1998 Dot-Com crash, 2002 stock...