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最后更新：2011-5-27 点击率：
Explaining the Financial Crisis of 2007-2009 by Efficient Markets Hypothesis
Student Name:
Student Number:
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Content
1.0 Introduction 3
2.0 Efficient Markets Hypothesis 3
3.0 Explaining the Financial Crisis of 2007-2009 by EMH 4
4.0 The Behavioral Finance 6
5.0 Conclusion 7
Reference 9
1.0 Introduction
In 2007, the U.S. subprime mortgage crisis caused the global financial crisis which is serious affect the global financial markets and securities markets. Scott (2009) indicated that every country has already put this financial crisis down to the excess financial innovation or lack of financial supervision for the financial markets, so that improving the financial regulation seems so necessary for the securities market. The Efficient Markets Hypothesis plays an important role in the financial crisis of 2007 to 2009, because of it direct related to the causes of subprime mortgage crisis. In addition, the traditional financial theory thought that the securities investors should be rational for maximizing their returns. However, with the development of the behavioral finance, the researchers found out that the subjective factors of investors affect the decision-making for investment and stock pricing (Frankel, 2009). It has pointed out that the behavioral finance can help and offer better explanations for the behavior of investors and financial markets.
2.0 Efficient Markets Hypothesis
Neely, et al (2009) has shown the definition of the Efficient Markets Hypothesis (EMH) is that prices of securities can fully reflect all available information about securities. There are three versions of the EMH, which are weak, semi-strong and strong forms of efficiency. For improving the efficiency of the market, the basic question is to solve the problems in the process of pricing securities which related to the information disclosure, information transmission, information interpretation, and information feedback (Boettke, 2010). Therefore, the EMH mentioned that everyone in the efficient market is rational economist, so that every company’s stock in the financial market is supervised by these people. Secondly, the price of securities can reflect the balance between demand and supply for these rational economists in the EMH. That means it is equal between the stocks’ prices were overvalued and the securities’ prices were undervalued. It indicates it has the possibility of arbitrage if exists disparity between these two, so that people will buy or sell shares for keeping balance immediately. In addition, Boettke (2010) has mentioned the most important point for EMH is that information efficiency, which means the stock’ price will be changed by the changing of information. Therefore, it shows that two signals for weighting if the market is efficiency are: if the stock’s price can be changed by the relevant information and if the relevant information are fully disclosure and distributed for making every investor get the same information at the same time.
3.0 Explaining the Financial Crisis of 2007-2009 by EMH
The financial crisis of 2007-2009 is caused by the American subprime crisis, which is the global financial storming. Hillman (2009) pointed out this financial crisis made the world’s major financial markets lack of liquidity, as a result of the bankruptcy of subprime mortgage lenders, the investment funds were forced to close and the securities market is shocked tempestuously. The basic reason for forming U.S. subprime crisis was the rising interest rates leading the high pressure for repayment for the users, so that appearing the possibility of default on bank loans which forming the financial crisis. Based on the Efficient Markets Hypothesis, the financial crisis between 2007 and 2009 is not accidental, but a result of both internal cause and external cause.
From the internal cause point of view, the subprime chain is too long caused by the information asymmetries and attenuation of information transmission efficiency is the root reason for this financial crisis. First of all, the U.S. commercial banks issued a large number of high-risk mortgage loans. In order to transferring the bank potential risks and withdrawal funds as soon as possible, the commercial banks sold these subprime loans to Fannie Mae and Freddie Mac (Bondi, 2009). Therefore, Fannie Mae and Freddie Mac packaged these loans according to the payment order and credit rating by the approach of asset securitization for forming mortgage-backed securities, and sold it to many investment banks, such as, Goldman Sachs, Merrill Lynch, and so forth. For chasing the high returns, these investment banks were using a variety of complex financial innovations for transferring the low grade subprime loans into other varieties for absorbing different risk preferences investors. Lastly, the investment banks sold these structured products to many financial institutions and investors by using the global market network (Suetin, 2009).
Although the U.S. financial institutions had transferred and dispersed the risks, the too long subprime chain made the information had the phenomenon which is information distortion and information leakage in the process of information transmission. Neely, et al (2009) indicated the basic hypothesis for the Efficient Market Hypothesis is the information is distributed adequately and equably for market participators. The original high risk and low grade subprime loans have been packaged to be the high grade structured products is the representation of information distortion, as a result of it covered up the high risks. And then, each part of the available information is the fragment, so that affected the investors’ judgments for those bonds and derivatives. In a word, the information distortion and information leakage cause the phenomenon of information asymmetry and the attenuation of information transmission efficiency, which violates the important precondition of efficient markets. The result for that are the American financial markets departed from the Efficient Market Hypothesis which brought serious attenuation of financial market’s efficiency, and the U.S. financial markets have come though the processes of strong-from to the semi-strong form, and then to the weak-form market which leading to a serious global financial crisis.
From the external cause point of view, the U.S. financial regulatory institutions over-relaxed the supervision for the financial market is the fuse of financial crisis, as a result of the misinterpretation of Efficient Market Theory. Gwinner & Sanders (2009) has pointed out that the U.S. financial regulatory institution thought that the U.S. financial market is strong from market by ignoring the precondition of Efficient Market Hypothesis. Thus, they overestimated that operation efficiency of financial market and the role of market self-regulatory, and eased the supervision for investment banks and the fields of financial innovation. The largest initiative is the United States Senate House adopted “Financial Services Modernization Act in 1999”, which is focused on the financial mixed management (Suetin, 2009). Although the mixed operation accelerated the financial innovation, it exacerbates the systemic risk of financial system and weakens the efficiency of financial markets, so that the subprime mortgage crisis spread to the entire financial system and eventually into the global financial crisis. Hereby, it indicates that the preconditions for Efficiency Markets Hypothesis are the information has the characteristics of completed and symmetry. Actually, the information of real market is incomplete and the investors are limited rationality, so that the strong-form for U.S. financial market is based on the ideal state. Therefore, the good interpretation of EMH can help the financial market have a good positioning for the market form, which can avoid the financial crisis.
4.0 The Behavioral Finance
Many researchers found that there are many models can’t properly explain and predict the investment behaviors, so that the behavioral finance can be used to explain the effects of emotions and cognitive biases in the process of decision-making of investors and stock pricing.
On the one hand, the cognitive influence can offer better explanations for the behavior of investors. Kumar (2009) has shown the self-confidence, the regret and some other psychological can affect the decision-making of investors. Investors always over-trust their judgments on the accuracy of the stock’s price and excessive preference their own information. Therefore, it makes them too optimistic when the prices are rising and too pessimistic when the prices are fell. For the profits and losses, the investors are paid more attentions on the adverse effect which caused by the losses. They are willing to take greater risks for preventing loss excess obtain more profits, although there still have some investors would like to adverse risks. In addition, Toporowski (2009) found out that the investors in United States, Japan and UK invested 94%, 98%, 82% of the total security number in the domestic stocks in 1999, which is hard to explain by the rational analysis. Actually, these high proportions mentioned that the home bias of the investors which belongs to the behavioral finance, as a result of the investors thought they would take lower risks and lower uncertainty for investing the domestic stocks. Thus, it can explain why the situation of insufficient diversification of securities market. From above, it shows cognitive influence of the behavioral finance can give better explanations for the decision-making of investors for the financial markets.
On the other hand, the behavior finance can better explain the stock pricing in financial markets. The irrational factors occur in every stage of the fluctuant stock market. According to the Kahneman’s theory, most of investors had the strong pessimism emotion for the end fall price of last cycle, so that quite hard giving the accurate analysis for the current market (Fay, 2009). Therefore, the stock prices are always small shocked when the positive trend appears in the financial markets, which can be explained by the inadequate response and isolation effect of behavioral finance. The irrational is the weakness of people which is difficult to overcome, so that the accumulation of individual irrational makes the irrational fluctuation of the whole financial markets. However, the number of participants and stocks in the transactions are changing constantly, so that the irrational fluctuation of capital market is only from the behavioral finance to study because the capital market is formed by many investors. Behavioral finance for investment can not accurately predict the stock prices, but it can analyze the psychology of investors and judge the fluctuation development of stock market. Therefore, it can offer the good understanding for the stock pricing of financial market.
5.0 Conclusion
For the Efficiency Markets Hypothesis, it shows that the prices of securities can reflect all available information about securities under the preconditions which are the information integrity and information symmetry. The financial crisis of 2007 to 2009 which caused by the U.S. subprime mortgage crisis is separated from the two basic conditions of efficient market. Based on the internal causes, the information asymmetries and attenuation of information transmission efficiency in the financial market brought the inevitability of financial markets, as a result of the stock prices didn’t reflect the real situation for the investors. Based on the external cause point of view, the over-relaxed financial regulatory supervision induced the global financial crisis, which enlarged the negative effect of securities markets.
xSubprimemortgagemorgage Fr Zh CN Tag Financial Services Subprime Mortgage Mortgage Explaining the Financial Crisis of 2007-2009 by Efficient Markets Hypothesis--水滴网,专业代写留学生论文q Subprime Mortgage Mortgage Subprime Mortgage Mortgage v v Subprime Mortgage Mortgage Subprime Mortgage Mortgage tSubprimemortgagemorgage Fr Zh CN Tag Financial Services Subprime Mortgage Mortgage Explaining the Financial Crisis of 2007-2009 by Efficient Markets Hypothesis--水滴网,专业代写留学生论文x Investment
Student Name:
Student Number:
Tutor:
Content
1.0 Introduction 3
2.0 Efficient Markets Hypothesis 3
3.0 Explaining the Financial Crisis of 2007-2009 by EMH 4
4.0 The Behavioral Finance 6
5.0 Conclusion 7
Reference 9
1.0 Introduction
In 2007, the U.S. subprime mortgage crisis caused the global financial crisis which is serious affect the global financial markets and securities markets. Scott (2009) indicated that every country has already put this financial crisis down to the excess financial innovation or lack of financial supervision for the financial markets, so that improving the financial regulation seems so necessary for the securities market. The Efficient Markets Hypothesis plays an important role in the financial crisis of 2007 to 2009, because of it direct related to the causes of subprime mortgage crisis. In addition, the traditional financial theory thought that the securities investors should be rational for maximizing their returns. However, with the development of the behavioral finance, the researchers found out that the subjective factors of investors affect the decision-making for investment and stock pricing (Frankel, 2009). It has pointed out that the behavioral finance can help and offer better explanations for the behavior of investors and financial markets.
2.0 Efficient Markets Hypothesis
Neely, et al (2009) has shown the definition of the Efficient Markets Hypothesis (EMH) is that prices of securities can fully reflect all available information about securities. There are three versions of the EMH, which are weak, semi-strong and strong forms of efficiency. For improving the efficiency of the market, the basic question is to solve the problems in the process of pricing securities which related to the information disclosure, information transmission, information interpretation, and information feedback (Boettke, 2010). Therefore, the EMH mentioned that everyone in the efficient market is rational economist, so that every company’s stock in the financial market is supervised by these people. Secondly, the price of securities can reflect the balance between demand and supply for these rational economists in the EMH. That means it is equal between the stocks’ prices were overvalued and the securities’ prices were undervalued. It indicates it has the possibility of arbitrage if exists disparity between these two, so that people will buy or sell shares for keeping balance immediately. In addition, Boettke (2010) has mentioned the most important point for EMH is that information efficiency, which means the stock’ price will be changed by the changing of information. Therefore, it shows that two signals for weighting if the market is efficiency are: if the stock’s price can be changed by the relevant information and if the relevant information are fully disclosure and distributed for making every investor get the same information at the same time.
3.0 Explaining the Financial Crisis of 2007-2009 by EMH
The financial crisis of 2007-2009 is caused by the American subprime crisis, which is the global financial storming. Hillman (2009) pointed out this financial crisis made the world’s major financial markets lack of liquidity, as a result of the bankruptcy of subprime mortgage lenders, the investment funds were forced to close and the securities market is shocked tempestuously. The basic reason for forming U.S. subprime crisis was the rising interest rates leading the high pressure for repayment for the users, so that appearing the possibility of default on bank loans which forming the financial crisis. Based on the Efficient Markets Hypothesis, the financial crisis between 2007 and 2009 is not accidental, but a result of both internal cause and external cause.
From the internal cause point of view, the subprime chain is too long caused by the information asymmetries and attenuation of information transmission efficiency is the root reason for this financial crisis. First of all, the U.S. commercial banks issued a large number of high-risk mortgage loans. In order to transferring the bank potential risks and withdrawal funds as soon as possible, the commercial banks sold these subprime loans to Fannie Mae and Freddie Mac (Bondi, 2009). Therefore, Fannie Mae and Freddie Mac packaged these loans according to the payment order and credit rating by the approach of asset securitization for forming mortgage-backed securities, and sold it to many investment banks, such as, Goldman Sachs, Merrill Lynch, and so forth. For chasing the high returns, these investment banks were using a variety of complex financial innovations for transferring the low grade subprime loans into other varieties for absorbing different risk preferences investors. Lastly, the investment banks sold these structured products to many financial institutions and investors by using the global market network (Suetin, 2009).
Although the U.S. financial institutions had transferred and dispersed the risks, the too long subprime chain made the information had the phenomenon which is information distortion and information leakage in the process of information transmission. Neely, et al (2009) indicated the basic hypothesis for the Efficient Market Hypothesis is the information is distributed adequately and equably for market participators. The original high risk and low grade subprime loans have been packaged to be the high grade structured products is the representation of information distortion, as a result of it covered up the high risks. And then, each part of the available information is the fragment, so that affected the investors’ judgments for those bonds and derivatives. In a word, the information distortion and information leakage cause the phenomenon of information asymmetry and the attenuation of information transmission efficiency, which violates the important precondition of efficient markets. The result for that are the American financial markets departed from the Efficient Market Hypothesis which brought serious attenuation of financial market’s efficiency, and the U.S. financial markets have come though the processes of strong-from to the semi-strong form, and then to the weak-form market which leading to a serious global financial crisis.
From the external cause point of view, the U.S. financial regulatory institutions over-relaxed the supervision for the financial market is the fuse of financial crisis, as a result of the misinterpretation of Efficient Market Theory. Gwinner & Sanders (2009) has pointed out that the U.S. financial regulatory institution thought that the U.S. financial market is strong from market by ignoring the precondition of Efficient Market Hypothesis. Thus, they overestimated that operation efficiency of financial market and the role of market self-regulatory, and eased the supervision for investment banks and the fields of financial innovation. The largest initiative is the United States Senate House adopted “Financial Services Modernization Act in 1999”, which is focused on the financial mixed management (Suetin, 2009). Although the mixed operation accelerated the financial innovation, it exacerbates the systemic risk of financial system and weakens the efficiency of financial markets, so that the subprime mortgage crisis spread to the entire financial system and eventually into the global financial crisis. Hereby, it indicates that the preconditions for Efficiency Markets Hypothesis are the information has the characteristics of completed and symmetry. Actually, the information of real market is incomplete and the investors are limited rationality, so that the strong-form for U.S. financial market is based on the ideal state. Therefore, the good interpretation of EMH can help the financial market have a good positioning for the market form, which can avoid the financial crisis.
4.0 The Behavioral Finance
Many researchers found that there are many models can’t properly explain and predict the investment behaviors, so that the behavioral finance can be used to explain the effects of emotions and cognitive biases in the process of decision-making of investors and stock pricing.
On the one hand, the cognitive influence can offer better explanations for the behavior of investors. Kumar (2009) has shown the self-confidence, the regret and some other psychological can affect the decision-making of investors. Investors always over-trust their judgments on the accuracy of the stock’s price and excessive preference their own information. Therefore, it makes them too optimistic when the prices are rising and too pessimistic when the prices are fell. For the profits and losses, the investors are paid more attentions on the adverse effect which caused by the losses. They are willing to take greater risks for preventing loss excess obtain more profits, although there still have some investors would like to adverse risks. In addition, Toporowski (2009) found out that the investors in United States, Japan and UK invested 94%, 98%, 82% of the total security number in the domestic stocks in 1999, which is hard to explain by the rational analysis. Actually, these high proportions mentioned that the home bias of the investors which belongs to the behavioral finance, as a result of the investors thought they would take lower risks and lower uncertainty for investing the domestic stocks. Thus, it can explain why the situation of insufficient diversification of securities market. From above, it shows cognitive influence of the behavioral finance can give better explanations for the decision-making of investors for the financial markets.
On the other hand, the behavior finance can better explain the stock pricing in financial markets. The irrational factors occur in every stage of the fluctuant stock market. According to the Kahneman’s theory, most of investors had the strong pessimism emotion for the end fall price of last cycle, so that quite hard giving the accurate analysis for the current market (Fay, 2009). Therefore, the stock prices are always small shocked when the positive trend appears in the financial markets, which can be explained by the inadequate response and isolation effect of behavioral finance. The irrational is the weakness of people which is difficult to overcome, so that the accumulation of individual irrational makes the irrational fluctuation of the whole financial markets. However, the number of participants and stocks in the transactions are changing constantly, so that the irrational fluctuation of capital market is only from the behavioral finance to study because the capital market is formed by many investors. Behavioral finance for investment can not accurately predict the stock prices, but it can analyze the psychology of investors and judge the fluctuation development of stock market. Therefore, it can offer the good understanding for the stock pricing of financial market.
5.0 Conclusion
For the Efficiency Markets Hypothesis, it shows that the prices of securities can reflect all available information about securities under the preconditions which are the information integrity and information symmetry. The financial crisis of 2007 to 2009 which caused by the U.S. subprime mortgage crisis is separated from the two basic conditions of efficient market. Based on the internal causes, the information asymmetries and attenuation of information transmission efficiency in the financial market brought the inevitability of financial markets, as a result of the stock prices didn’t reflect the real situation for the investors. Based on the external cause point of view, the over-relaxed financial regulatory supervision induced the global financial crisis, which enlarged the negative effect of securities markets.
xSubprimemortgagemorgage Fr Zh CN Tag Financial Services Subprime Mortgage Mortgage Explaining the Financial Crisis of 2007-2009 by Efficient Markets Hypothesis--水滴网,专业代写留学生论文q Subprime Mortgage Mortgage Subprime Mortgage Mortgage v v Subprime Mortgage Mortgage Subprime Mortgage Mortgage tSubprimemortgagemorgage Fr Zh CN Tag Financial Services Subprime Mortgage Mortgage Explaining the Financial Crisis of 2007-2009 by Efficient Markets Hypothesis--水滴网,专业代写留学生论文x Investment