To what extent does the Efficient Market Hypothesis (EMH)...

Introduction It was previously assumed that economic investors and regulators (agents) utilised all available information and thus market prices were a reflection of this information with assets representing their fundamental value, encouraging the position that agents’ actions were rational. The 2007-2008 Global Financial Crisis (GFC) is posited to have originated from the notion that all available information was utilised, causing agents to fail to thoroughly investigate and confirm â€Å"the true values of publicly traded securities,† leading to a failure to register the presence of an asset price bubble preceding the GFC (Ball 2009). This essay will use the notions of EMH to determine the extent to which they can explain the Global†¦show more content†¦This argument becomes redundant when we consider that investors did know that asset prices were wrong because the favoured strategies of trading desks and proprietary portfolios were primarily founded on market mispricing, hence this can be seen as the cause of huge losses in 2007-2008. In this financial crisis, it was the knowledge and recognition of mispricing that were a probable cause of the GFC as agents were prepared to bid up the price of assets and allow subprime mortgages to continue to be traded even although common sense would suggest that 100% finance to subprime candidates was destined for failure and would burst the asset bubble as US mortgage defaults increased alongside foreclosures. Further to the argument that agents were ignorant of and failed to engage with new information, the formation of asset price bubbles has been offered as a cause for the GFC. Ball argues that it is inherently difficult to recognise the presence of an asset price bubble until after the event has affected the market and even by recognising that prices did not accurately reflect true value, this could never have indicated a nearing price bubble burst to investors because EMH suggested that all then available information wasShow MoreRelatedEfficient Market Hypothesis Vs Behavioural Finance1747 Words   |  7 PagesEfficient Market Hypothesis v’s Behavioural Finance An efficient market is one in which share prices quickly and fully reflect all available information, where investors are rational, and there are no frictions. Investors determine stock prices on the basis of expected cash flows to be received from a stock and the risk involved. 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