Question

Discuss in 500 words or more how efficient the U.S. financial markets are in pricing financial securities. (Consider such questions as, "Are security prices reliable?", "What factors promote or reduce pricing efficiency?", and "How can we account for significant pricing fluctuations?")

Answer 1

US financial markets’ efficiencies was a discussion point in many financial academic journal and press for many years. Many events happened in past which pointed fingers on US financial markets, like dot-com bubble tragedy of 2000, crashing of stock market in 1987, and biggest of all was financial meltdown of 2008. There were many investors who have made good profits in those eras year by year. The word, market anomalies, was first coined in these periods only which was relatable by various financial economist putting pressure on increased interest in market efficiencies. Meaning of efficient markets is one of the debatable issues which got involved in considerable misunderstanding which was not clarified among academicians. As an investor in equity markets, whether financial or non-financial institution or individual, only handful of people or organizations cannot be making excessive profits systematically in securities.

As an investor, I believe the markets are reliable even after market crashes, financial meltdown, bubbles bursting. There are considerable evidence which supports market efficiency. There is a theoretical concept which throws light on efficient market hypothesis or market efficiency in security trading. A renowned finance scholar, Eugene Fama, published a paper which mentions market efficiency have two forms-

1. A market is considerable efficient if the prices of securities reflecting in all public and private platforms are available. This means that an insider cannot take advantage of some privileged information which is known only to few and can fluctuate the prices in financial markets. This means one cannot buy or sell securities to make profit using information access. There are strong laws which help in menacing this information.

2. Markets can be considered as nearly efficient, which is also known as semi-strong form. It highlights that the information spreading of some specific event or any other means of activity like Social, economic, or natural events (e.g., unexpected increase/decrease in interest rates, earthquakes, tsunami, or some social/political unrest.) which can affect the operations/profitability of an organization, which in terms will affect the market linekd stock prices. This stock price fluctuations would affect instantaneously so that the value linked with this news can result in affecting investors’ profit.