Today there are a lot of heated debates with regard to the efficiency of financial markets. After the Dot-com bubble and the global financial crisis many economists started to argue that financial markets are inefficient due to several reasons, especially because of such issue as the asymmetric information. Nevertheless, another group of financial professionals still believe that markets fully resemble all the information available, thus security prices are correct. Therefore, the question whether the Efficient Market Hypothesis is true or not remains to be unsolved.
Recently I have read the article published on 1 March, 2016 in Wall Street Journal. This article, i.e. Dow Rises Nearly 350 Points on Upbeat Data by Leslie Jospehs, is quite interesting because it emphasizes the issue of market efficiency one more time (Josephs, 2016). I have decided to apply knowledge received in Chapter 2 to analyze the article and evaluate its importance.
Firstly, we should start with the short summary of the article. Leslie Josephs states that the vast majority of U.S. stock indexes reached their peak, comparing with the beginning of this year. Previous months were marked with fall in price of financial and technology shares because the whole world expected that the global growth would become weaker. Furthermore, the oil prices and corporate profits continued to fall, thus creating certain uncertainty among investors and other financial actors. Consequently, the bad news and negative expectations influenced the market, leading to the fluctuations in Dow Jones Industrial Average. However, the new publically available information has changed the situation in financial markets for the better. For instance, the portfolio manager at BMO Global Asset Manager stated that the real situation was underestimated, i.e. the world performs much better than everybody expected. Realizing that everything is not as bad as it seemed before, the Dow Jones Industrial Average and the S&P started to grow quite rapidly. Thus, as we can see, the release and expansion of new optimistic information has affected the financial system in the positive manner.
After reading Chapter 2, particularly the information regarding the Efficient Market Hypothesis, I have decided to investigate whether we can consider the stock market to be efficient one. If the answer is yes, so the next question that arises is what efficiency is accurate in describing this market. As we have already mentioned above, the market is considered to be efficient when the current prices of securities incorporate the knowledge and expectations of all financial actors. I suppose that the statement that the stock market is efficient can be confirmed by this article because we see that the release of new data causes certain shifts in stock prices. However, the data given in the article doesn`t allow us to determine whether the efficiency is strong, semistrong or weak. We personally assume that it has a semistrong form because the market reacts simultaneously to any new set of data, whereas the weak-form efficiency is based only on the past tendencies and dynamics.
On the other hand, we cannot suggest that this market has the strong-form efficiency because we do not have any confirmation that separate financial actors obtain insider information that can significantly influence the situation in financial markets. Instead, in our case the optimistic expectations that disseminate quickly among all the actors made the stock prices go up.
Works Cited
Josephs, Leslie. “Dow Rises Nearly 350 Points on Upbeat Data.” Wall Street Journal, 1 March 2016. Web. 2 March 2016.
