Financial Crisis
The recent financial crisis has provided evidence that financial markets are not efficient. Critically, evaluate this statement and its implications for investment management practice.
In reality a financial market can’t be considered to be extremely efficient, or completely inefficient.
The financial markets are a mixture of both, sometimes the market will provide fair returns on the investment for everyone, while at other times certain investors will generate above average returns on their investment.
If we are taking about the efficiency of the market, we have to examine two important aspects:
The efficiency of the market and the efficient market hypothesis:
The efficient market:
An efficient financial market is a market in which prices always fully reflect available information.
Financial efficiency could also be defined as: Financial efficiency should be defined as the sector’s ability to stimulate long-term economic growth and provide consumption smoothing services. A key objective of regulatory reform is to devise a system that allows weeding out financial instruments which do not contribute to functional or social, efficiency.
The concept of market efficiency had been anticipated at the beginning of the century in the dissertation submitted by Bachelier (1900)
The efficient market hypothesis:
An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.
In other words ,this theory states that in any given time,
In reality a financial market can’t be considered to be extremely efficient, or completely inefficient.
The financial markets are a mixture of both, sometimes the market will provide fair returns on the investment for everyone, while at other times certain investors will generate above average returns on their investment.
If we are taking about the efficiency of the market, we have to examine two important aspects:
The efficiency of the market and the efficient market hypothesis:
The efficient market:
An efficient financial market is a market in which prices always fully reflect available information.
Financial efficiency could also be defined as: Financial efficiency should be defined as the sector’s ability to stimulate long-term economic growth and provide consumption smoothing services. A key objective of regulatory reform is to devise a system that allows weeding out financial instruments which do not contribute to functional or social, efficiency.
The concept of market efficiency had been anticipated at the beginning of the century in the dissertation submitted by Bachelier (1900)
The efficient market hypothesis:
An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.
In other words ,this theory states that in any given time,