To what extent does the Efficient Market Hypothesis (EMH) Explain the Global Financial Crisis?

This common outbreak of speculation caused about three main financial problems. First, this sudden stream of money going into the stock market caused the share prices to inflate, which caused the actual stock’s

It is often said that perception outweighs reality and that is often the view of the stock market. News that a certain stock may be on the rise can set off a buying spree, while a tip that one may be on decline might entice people to sell. The fact that no one really knows what is going to happen one way or the other is inconsequential. John Kenneth Galbraith uses the concept of speculation as a major theme in his book The Great Crash 1929. Galbraith’s portrayal of the market before the crash focuses largely on massive speculation of overvalued stocks which were inevitably going to topple and take the wealth of the shareholders down with it. After all, the prices could not continue to go up forever. Widespread speculation was no doubt a

Lets go back to December 5th, 1996 when Greenspan said “Irrational exuberance and unduly escalating stock prices.” Those words alone triggered markets around the world to decline. The Japanese stock market took a 3.2% plunge and the German market fell 4%. When the stock market opened in the United States, the New York Stock Exchange went down 145 points in 30 minutes.

In Frontline’s The Meltdown, the causes of the stock market crash of 2008 came into discussion. The topics regarding Bear Stearns, the Lehman Brothers’ and their collapse, and the huge bailout made in results to the market crash. There were great points being made on the mistakes Henry Paulson and Ben Bernanke did not view from their perspective, which in turns were the problems that made up the crash.

Throughout the text of the book, you will read about different bubbles that occurred in history. Some of these bubbles have happened in the last ten years and some have happened in the last three hundred years. One of the most interesting bubbles that I read about was “The South Sea Bubble”. The South Sea Company in England was formed in 1711 to create confidence in the government’s ability to meet its debts and promises. This company took a government debt (IOU) for ten million pounds. In return, the government was given monopoly over all trade to the South Seas (Malkiel, Page 41). People thought there would be a lot of opportunity to make money during this time. In 1720, the entire national debt, which was thirty one million pounds, was capitalized. The stock rose from 130 pounds to 300 pounds when the bill was introduced to Parliament. After bill became the law, the South Sea Company sold a new issue of stock at 300 pounds. There were fights that broke out by investors who wanted to purchase this new stock price at a proposed installment offer.

In late October of 1929, the U.S. stock market crashed, setting our nation into the Great Depression. In an attempt to reveal the true catalysts of the event, the book “Causes of the 1929 Stock Market Crash” examines popular beliefs of what really caused the economic tragedy. The nine questionable causes that are discussed in this book are that the stock market was too high in September of 1929 due to “excessive speculation” (Bierman 32), there was a downturn in business activity, the Hatry affair, the Federal Reserve Board’s actions, a message that there was a “war” against speculators, excessive buying on margin and of investment stocks, excessive leverage in terms of debt, a competitively priced utility market segment paired with a setback in the public utility market, and an overreaction by the stock market.

The boom of the industrial revolution changed many things in America, and roles began to shift. Many farmers moved their families into the cities and began working in factories. Not only did men work in these factories, but many women did as well. During the beginning of the twentieth century we begin to see a huge rise in women in the work force. In the novels A Fierce Discontent by Michael McGerr, The Jungle by Upton Sinclair and Industrial Workers in Chicago by Lizabeth Cohen, each author paints a picture of what lives of different individuals was like during this time period. There are many different themes that the authors discuss in their novels such as race, labor, wealth, region, gender, and many more. One theme that is most intriguing is that of the women workers during the early twentieth century. Women in the workforce begins to explode during this time and will really take off during World War II. The road that women had to travel to get to where we are today was a rough one. These three books discuss well womens struggle in the work place and In particular the authors discuss the different things that working women had to endure such as discrimination, class struggle and working conditions.

No, I think that the individuals that run the stock market are now fully aware of why the stock market crashed and

At the height of the 2008 financial crisis, Mr. Lawrence G. McDonald wrote a book on the fall of Lehman Brothers, entitled "A Colossal Failure of Common Sense." This book is a risk manager 's guide to the right and wrong moves on Wall St., and explains why investors must stay ahead of policies coming out

“The single greatest contributor to financial crises is the Federal Reserve manipulating interest rates in ways that distort the true price of capital.” (Kibbe, 2011) The distortion of numbers created a false sense of overinvesting when in actuality they are responding to false economic signals. Just like the Great Depression, the stock market was not the only thing that was effected, unemployment doubled and debt rose from 66% to 103%. The housing market also took a hit falling 30%.

To guide my research, a variety of methods was implored. A few years ago, I was afforded the opportunity to study the development of Intercultural Education policies in communities of African descent in Ecuador. At the time, the country had started to make the plight of Afro-Ecuadorians more a part of the national discourse, and many new initiatives addressing the economic and social development of Afro-Ecuadorians had been erected. During the research study, I spent time visiting schools and community organizations aimed at fomenting educational opportunities for Afro-Ecuadorians in Chota Valley, Guayaquil, and Esmeraldas- regions that have the highest population of Afro-Ecuadorians. Although I was overwhelmed by the veracity of organizers, government officials, and school personnel committed to educational advancement for students of African descent, it was the efforts of leaders in Esmeraldas that

Now that the two theories have been explained, let’s look at some historical examples from Malkiel that really paint the picture in chapter 2. The first speculative craze noted was over tulips in the seventeenth century in Holland. The tulips were brought from Turkey and the Dutch valued the beauty and rarity of the new flowers. Thus the prices for the flowers inflated. As the prices rose merchants would by stockpiles to sell to the public. The more expensive they got the more the public believed they were making smart investments. People would sell off the personal belongings to get their hands on the bulbs. The mania surrounding the bulbs created a bubble that would soon burst. The prices got so high some people decided to cash in and sell them to make a handsome profit. Soon others joined in causing a snowball effect and the prices tumbled. Eventually there was no demand and they were worthless. Many went

The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years. “Behavioural finance, however, is now seriously challenging this premise by arguing that people are clearly not rational” (Ross, (2002)). Behavioral finance uses facts from psychology and other human sciences in order to

As Chapter 10 questions, if further evidence continues to surface that capital markets do not always behave in accordance with the efficient market hypothesis, then should we reject the research that has embraced the EMH as a fundamental assumption? In this regard we can return to earlier chapters of this book in which we emphasised that theories are abstractions of reality. Capital markets are made of individuals and as such it would not (or perhaps, should not) be surprising to find that the

The most prominent and possibly the most notable market crash is the ‘Global Financial Crisis’ which was a direct repercussion of the neo-liberal policies which were implemented at the time and for which many of today’s global economic problems has stem from. These policies predominately include the replacement of government functions and services with profit-seeking entities, or more commonly known as privatisation and most importantly the deregulation of the economic market (Beder, 2006). Due to the deregulation, financial institutions and other economic players were able to invest in more complex financial markets which were beyond their understanding and a result a market crash occurred and the detrimental effects were widespread. If regulation had been put in place to monitor investment activity then it has been argued that the Global Financial Crisis would not have occurred and the associated global economic problems we are experiencing today would not have eventuated (Dag Einar Thorsen, 2013). As neoliberal policies where implemented around the world casing the global financial crisis the world disparities in wealth and income increased as well as poverty, contradicting neoliberal theories that by increasing the wealth at the top everyone becomes better off.