For this paper, the writer will have to read the two post and react to them in one paragraph each. The
writer will expand and constructively challenge each of this postings using a minimum of one scholarly
article to support his point. each posting respond must have a minimum of 250 words and APA must be
use . The writer will respond directly on the uploaded paper with the respond coming directly under each
posting as indicated. the references must be in APA format.
It is strongly recommended that the writer tie each response to each posting reacting to the
post directly why offering more insight on the topic of the post below.
Market Efficiency Theory
The theory of market efficiency is based on the premise that a market is considered efficient
when stock prices are an actual reflection of information known about a company. U.S. markets
are generally viewed as semi-strong form market efficient.
What would happen if U.S. markets became less efficient?
What might lead to markets becoming less efficient?
How do markets in other countries compare to the U.S. in terms of efficiency?
For this paper, the writer will have to read the two post and react to them in one
paragraph each. The writer will expand and constructively challenge each of this postings
using a minimum of one scholarly article to support his point. each posting respond must
have a minimum of 250 words and APA must be use . The writer will respond directly on
the uploaded paper with the respond coming directly under each posting as indicated. the
references must be in APA format.
Post 1
In a one paragraph each expand and constructively challenge each of this postings, using a
scholarly article to support your point on each paragraph
Market efficiency theory states that investors have accurate information and use it correctly to
make informed decisions about their investments (Markowitz, 2005). This evens the playing
field for investors because each investor has the same amount of information to make informed
decisions about their investment. It is an unrealistic expectation that all investors would have the
same type of information. If that were the case, then there would not be investors that outperform
the market like Warren Buffet. Even if all investors have accurate information some investors
may interpret them differently. Some investors may interpret to mean that the company is in a
healthy financial position while others may see the loop holes and not want to invest in that
particular company.
If U.S markets became less efficient then there would be greater variability in the market. Less
efficient means that different investors have different amounts of information. This would lead to
bubbles in pricing and volatility in the market because investors would behave differently from
one another because of the differences in their knowledge.
One major reason for a market to become less efficient is the behavioral patterns of investors.
Some investors behave differently to others when they have information about a stock. Some
investors are more risky than others and their buying or selling pattern will have an influence on
the overall stock price. Another reason would be insider trading which is illegal but could
happen. Investors may be privileged to information about a company before it is released to the
public. If investors have financial information about earnings before the release date they may
choose to buy or sell more of that particular stock. It would make the market inefficient because
not everyone has this information so therefore everyone would not behave the same way.
The options market in India is considered to be priced efficiently according to Mohanti and
Priyan (2014). They observed little or no difference in the price of stock using the Black Scholes
formula compared to the actual price of the stock. Their findings suggest that the Indian market
was efficient for the period 2008 to 2012.
References
Markowitz, H. M. (2005). Market efficiency: A theoretical distinction and so what?.Financial
Analysts Journal, 61(5), 17-30.
Mohanti, D., &Priyan, P. K. (2014). An empirical test of market efficiency of Indian index
options market using the Black–Scholes model and dynamic hedging strategy. Paradigm 18(2),
221-237. doi:10.1177/0971890714558709
Write a one paragraph hear to expand and constructively challenge the above postings,
using a scholarly article to support your point.
The definition of market efficiency varies but it’s directly related to the information that the
investors have and which is reflected on the prices of stock. Fama (1970) suggests that weak
market efficiency is based on information on past prices while semi-strong efficiency is based on
information on current prices. Strong efficiency is based on current prices and real time
information. The US is considered as the most industrialized nation on earth and its largely
because of its advanced communication and information systems. The information on all listed
companies is available to all investors and the stock markets transactions are also available round
the clock through on line networks. Hence the efficiency of the US stock markets cannot be
matched globally. The huge investments that most multinational companies have made in the US
must be related to the efficiency of the market. Capital markets that have lower transactional
costs compared to the financial gains from the market provide more efficiency in the market as it
draws more participants hence more investors. If the capital markets increased their transactional
costs to be even with the market returns then all the gains in investments would be lost as most
investors would find the market unprofitable hence sell out their shares. These actions would
result in less participants and reduced amount of investments in the capital market. Inefficiency
in the capital markets would mean reduced investments. Other causes of inefficiency like insider
trading and behavioral patterns are can be tackled through the right channels (Markowitz, 2005).
Insider trading in the US is illegal while behavioral patterns last only a few days or weeks after
or before major company announcements. These actions provide self checking mechanism as
share prices would rise if the public has high expectations on a company’s performance however
the confidence wanes once reality sinks in that nothing new is forthcoming from company
changes.
References
Fama, E.F. (1970) Efficient Capital Markets: A Review of Theory and Empirical Work, The
journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual
Meeting of American Finance Association Blackwell Publishing for the American
Finance Association, New York, N.Y. December, pg.28 – 30. Retrieved June 11 2015
from
http://efinance.org.cn/cn/fm/Efficient%20Capital%20Markets%20A%20Review%20of%
20Theory%20and%20Empirical%20Work.pdf
Markowitz, H. M. (2005). Market efficiency: A theoretical distinction and so what?.Financial
Analysts Journal, 61(5), 17-30.
Post 2
What would happen if U.S. markets became less efficient?
Since the time of the Founding Fathers, U.S. leaders have believed in the concept of American
exceptionalism, that the U.S. is a unique country with a special mission (Ross, Westerfield, &
Jaffe, 2013). It is a notion that continues to this day. A debt crisis in Portugal could send ripples
of uncertainty through world financial markets, and if a larger country like Spain fell into crisis,
those ripples could prove mighty destabilizing. But U.S. debt runs the risk of crashing the entire
operating system of the global economy. Here’s what I mean:
Not only is the U.S. the world’s largest economy by far but it also dominates the global monetary
system. In many respects, the entire architecture of global finance is built upon the U.S.
economy. Its capital markets are the most liquid. The dollar is the world’s No. 1 reserve currency
and the primary one used in foreign exchange transactions and trade. Countries like China and
Japan have their national wealth stored to a high degree in U.S. debt. When investors get
nervous, they rush to U.S. dollar based assets, and especially U.S. debt. The perception has
always been that the U.S. is the ultimate safe haven. Even as its financial condition sickens, that
perception remains. Despite a dramatic increase in U.S. deficits and debt in recent years, the
country has still been able to borrow at exceptionally low rates. In other words, the U.S. has
benefited tremendously from its economic exceptionalism (Ross, Westerfield, & Jaffe,
2013).Now let’s see what would happen if that perception fundamentally changed. U.S. Treasury
securities would be seen as riskier and would, therefore, become less attractive. Interest rates
would rise in the U.S. as a result, not only making it harder for the government to finance budget
deficits and debt, but also raising borrowing costs across the economy, slowing investment and
consumption. The U.S. dollar would weaken, undermining the value of currency reserves around
the world and speeding us along to the day when the dollar is no longer the world’s premier
currency. All that would be destabilizing enough. It would likely mean slower growth in the
world’s largest economy, deteriorating living standards for Americans and thus slower growth
for the entire global economy (Ross, Westerfield, & Jaffe, 2013).
What might lead to markets becoming less efficient?
An immediate and direct implication of an efficient market is that no group of investors should
be able to beat the market consistently using a common investment strategy. An efficient market
would also carry very negative implications for many investment strategies and actions that are
taken for granted. In an active market, equity research and valuation would be a costly task that
provided no benefits. The odds of finding an undervalued stock should be random (50/50). At
best, the benefits from information collection and equity research would cover the costs of doing
the research. In an efficient market, a strategy of randomly diversifying across stocks or indexing
to the market, carrying little or no information cost and minimal execution costs, would be
superior to any other strategy that created larger information and execution costs. There would
be no value added by portfolio managers and investment strategists. A policy of minimizing
trading, i.e., creating a portfolio and not trading unless cash was needed, would be superior to a
strategy that required frequent trading (Mohanti&Priyan, 2014).
How do markets in other countries compare to the U.S. in terms of efficiency?
The United States has recovered more quickly than other countries that don’t use the euro
including Japan, New Zealand, Denmark and Britain. The performance is all the more
remarkable considering that the financial crisis that sent much of the world into recession was set
off by American homeowners defaulting on their mortgages, taking down a big chunk of the
nation’s banking sector (Ross, Westerfield, & Jaffe, 2013).
The one crucial area in which the United States has performed worse than its peers is in jobs.
Joblessness is at record highs in countries like Spain and Greece. But many European countries
have done a much better job of protecting employment than the United States. In Austria,
Germany and Belgium, the governments paid companies to put workers on short-time work
rather than lay them off. Sweden also has a longstanding wage subsidy. Alongside stronger
unions and stiffer employment regulations that make it tougher to fire workers, these countries
managed to prevent soaring unemployment. Total employment in Britain, Germany, the
Netherlands, Austria, France and even Italy has recovered more from the financial crisis than it
has in the United States. Though the United States has grown faster than France (Van, 2011).
References
Mohanti, D., &Priyan, P. K. (2014). An empirical test of market efficiency of Indian index
options market using the Black–Scholes model and dynamic hedging strategy. Paradigm 18(2),
221-237. doi:10.1177/0971890714558709
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance (10 ed.). New York:
McGraw-Hill Irwin.
Van Bergen, J. (2011). Efficient market hypothesis: Is the stock market efficient? Retrieved from
Forbes: http://www.forbes.com/sites/investopedia/2011/01/12/efficient-market-hypothesis-is-the-
stock-market-efficient/
Write a one paragraph hear to expand and constructively challenge the above postings,
using a scholarly article to support your point.
The US economy is driven by its competitive capital markets that literally support the livelihood
and financial security of the American people (Ross, Westerfield, & Jaffe, 2013). The few cases
that the US capital markets have been presumed to be inefficient have resulted in massive losses
globally. The 2008 – 2009 global economic crises are closely related with the events that took
place in the US following the collapse of the Lehman brothers and other financial institutions
during that period. Inefficiencies in capital markets lead to losses both to investors and the
companies (Fama, 1970). The prices of shares are associated with the events that are taking place
at the capital markets and the information that the investors are receiving Negative information
on the performance of a company is enough to send the share prices tumbling downwards.
The causes of inefficiencies in the capital market in the US may only be caused by interference
by the government in the form of increased taxes that may decrease company profits resulting in
decreased dividends and later reduced company share prices (Litzenberger & Ramaswamy,
1982). The other forms of inefficiency may occur as a result of insider trading where company
officials may leak information to certain people who would take advantage in the market
performance for companies that are introducing new products in the making or expanding
operations in potential markets (Jegadeesh & Titman, 1993).
Compared to other countries the US has been a market setter. Its relatively more efficient capital
markets are the largest globally and very successful. Emerging markets like China and Japan
remotely compare to the US. The capital markets in the US are favorably placed because of the
high GDP per capita in the US compared to China. More people are able to save and invest in the
capital markets in the US compared to China, though the population of China is many times that
of the US (Blanchard, 2011). But the US has to do more to protect its employment opportunities
at home as most companies relocate to the Asian countries that have cheap labor.
References
Blanchard, O. (2011). Macroeconomics Updated (5th Ed.). Englewood Cliffs: Prentice Hall.
Fama, E.F. (1970) Efficient Capital Markets: A Review of Theory and Empirical Work, The
journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual
Meeting of American Finance Association Blackwell Publishing for the American
Finance Association, New York, N.Y. December, pg.28 – 30.
