{"id":138,"date":"2024-05-04T00:29:28","date_gmt":"2024-05-04T00:29:28","guid":{"rendered":"https:\/\/wrinkledworld.com\/?p=138"},"modified":"2024-09-15T20:47:15","modified_gmt":"2024-09-15T20:47:15","slug":"efficient-capital-markets","status":"publish","type":"post","link":"https:\/\/wrinkledworld.com\/fr\/efficient-capital-markets\/","title":{"rendered":"Efficient Capital Markets?"},"content":{"rendered":"
\n

Efficient Capital Markets?<\/h1>\n

Research, history, and applications<\/h1>\n

Dr. Jonathan Cooley <\/strong>\u848b\u80fd\u80dc<\/strong>\u00a0<\/strong>DBA, MBA, BS<\/em><\/strong><\/p>\n

Abstract<\/strong><\/p>\n

This article explores the concept model of efficient markets made popular by Fama, the 2013 Nobel Prize winner in economics, and his co-winner, economist Robert Shiller.\u00a0Shiller has challenged the efficient market hypothesis as a \u201chalf-truth\u201d since the late 1990s\u00a0through today\u00a0concluding\u00a0that although capital markets can be efficient, they can also be irrational and not properly reflect asset values.\u00a0The article further explores the literature and current articles regarding those key factors that can \u2013 and do \u2013 make domestic and international public capital markets inefficient.\u00a0The article concludes\u00a0there\u00a0are four key elements acting\u00a0on efficient markets\u00a0and these\u00a0forces will not necessarily\u00a0be mitigated\u00a0through regulation,\u00a0and\u00a0the\u00a0effect of these four forces can be extended\u00a0into other capital asset markets.<\/p>\n

Keywords: Stock Crash, Efficient Markets, Stock, Random Walk, Insider Trading, Irrational Markets, Information Velocity, Equity Markets, Arbitrage, Shanghai Exchange, Shenzen China exchange, International Accounting Standards IAS, Artificial Intelligence AI<\/p>\n

Historical Overview<\/strong><\/p>\n

Market efficiency assumes that asset prices will adjust up or down and immediately reflect all information available to investors; therefore, investors cannot outperform the markets or other investors in a consistent manner through abnormal risk-adjusted returns. The concept was first discussed regarding the public financial markets by Charles Conant in 1904 (Conant, 1904). The term was coined by Harry Roberts of the University of Chicago, and made further famous by Eugene Fama in 1969 (Fama, Fisher, Jensen, & Roll, 1969). In 1960, the Ford Foundation funded CRSP (Center for Research in Security Prices). The resulting database allowed scholars to empirically study the actual price history of public stocks all the way back to 1926 for the first time, adjusted for splits, dividends, and the like (Shiller, 2012). This allowed a revolution in finance and first demonstrated that actual results were consistent with the efficient market hypothesis (Boettke, 2008; Lehrer, 2010).<\/p>\n

The concept of the random walk (Malkiel, 1999;\u00a0 Shlller, 2012) is also central to the efficient market hypothesis; essentially, the historical price trend of a stock or stock market does not influence the next price point and prices adjust to fully reflect all publicly available information.<\/p>\n

On the other hand, technical analysis looks to stock performance charts to predict buy and sell points based on investor performance without regard to public information. An example is the \u201chead-and-shoulders\u201d pattern of price changes that key buy\/sell orders (Hodnett & Heng-Hsing, 2012; Shiller, 2012). This approach falls into the behavioral finance pricing hypothesis that markets reflect investors\u2019 moods, fears, expectations, and prejudice. Shiller suggests that the markets reflect both efficiency and behavioral components.<\/p>\n

Based on original research and following studies by Fama (1969, 1970, 1998),\u00a0 Higgins (2012) summarizes there are three forms of efficient markets: i) the weak-form, ii) the semi strong-form, and iii) the strong-form. Fama concluded that extensive market pricing tests indicate that most financial markets are semistrong \u2013 current prices fully reflect all publicly available information. Therefore, the markets may be efficient on the whole; however, other studies indicate they can and do become inefficient. Key underlying support for the efficient market then becomes \u201cwhat information is available, to whom, and when.\u201d<\/p>\n

This article limits the discussion to public stock markets and explores a few key issues that may cause these markets to be inefficient. Similar arguments can, however, also be made with the pricing of other assets such as debt instruments (e.g., bonds, subordinated debt, mortgages) and commodities.<\/p>\n

Efficient Capital Markets<\/strong><\/p>\n

Let us consider the argument that not all markets are efficient and the efficient public market hypothesis is a \u201chalf\u2013truth\u201d (Boettke, 2010; Shiller, 2012). Nagaswaren (2013) argues that markets are inherently inefficient in concert with the conclusions of other studies (Hodnett&Heng-Hsing, 2012; Kitson,2012; Leroy,1976).\u00a0 For example, to allow markets to adjust both up and down, there should be no restrictions on shorts, puts or futures. Market regulators worldwide, however, have placed certain restrictions on all these instruments, and shorts do not even exist for some markets such as the China exchanges. Bull (optimistic) and bear (pessimistic) market cycles also suggest there is a strong public clustering sentiment (even a \u201cherd mentality) involved in asset pricing.<\/p>\n

Current articles and the literature suggest\u00a0there are\u00a0primary causes for inefficient markets\u00a0and these\u00a0can\u00a0be categorized\u00a0into four areas.\u00a0These are:<\/p>\n