The Global Financial Crisis and the Efficient Market Hypothesis
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Provide and clear and detailed respond to the below questions from the article "The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?" by Ray Ball, University of Chicago
Question #1: The author gives several reasons why the blame cast on the EMH for the global financial crisis is unfounded. Which one makes the most sense to you? Why? Which argument do you disagree with, or are not convinced by? Why?
Question #2: The author proposes several lessons about market efficiency that we can learn from the financial crisis. One is that there are limitations to the EMH as a theory of financial markets. He specifically argues that the EMH is silent on the "supply side" of the information market. What does he mean by this? Do you agree with his view? Why or why not?
Question #3: What are the implications for corporate financial managers of the EMH as articulated and defended by the author? Frame you answer around implications for issues such as capital raising, dividend payouts, capital expenditures, managerial incentives, and firm performance.
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Using the article "The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?" the solution addresses three questions about the global financial crisis.
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Question #1: The author gives several reasons why the blame cast on the EMH for the global financial crisis is unfounded. Which one makes the most sense to you? Why? Which argument do you disagree with, or are not convinced by? Why?
EMH is the natural candidate for putting the blame of global financial crisis. The argument that makes most sense is that the financial regulators were too lax in their market supervision due to mistaken belief in EMH. Regulators could have been more careful on ensuring that there is reliable flow of adequate information to the public rather than holding hands of investors. If regulators were true believers of efficiency they would have been skeptical of consistent high returns that were posted by some of the major financial institutions. They failed to relate that higher returns could mean higher leverage, higher risk, insider information and dishonest accounting.
An argument that I disagree with is that EMH believes that markets themselves are costless to operate. One such counter to this belief is the stock market facilitates low cost and high volume transactions, but does not do so without transaction costs. If there are pricing errors that are not eliminated because these are lower than the transaction costs involved. It cannot be ...
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