Based on recent event, discuss whether the stock markets are efficient Essay

Based on recent event, discuss whether the stock markets are efficient according to the Effficient Market Hypothesis - Essay Example This is based on the ideal of ‘a balancing act’, where markets are regarded as knowing the best means forward. However, skeptics of the above, view markets as being necessarily inefficient due to the various forms of risks involved. The reasoning behind the aforementioned theory is that a free and competitive market arena does place various pricing indices to their true basic values. Lo (2007), provides that the Efficient Markets Hypothesis (EMH) does showcase the fact that market pricing indices do fully reflect all available data. This however does not eliminate critique, especially from behavioral economists and psychologists, who view it as being founded on assumptions which are counter-factual, especially with regard to human behavior/ rationality. A distinction is made between technical and fundamental analysis of stock pricing indices. The former, entails the utility of volume charts and geometric patterns in pricing, towards forecasting a given security’s future price fluctuation. The latter on its part, is concerned with the utility of both economic and accounting data, towards determining a given share’s fair valuation. Pegged on this assumption is the fact that as the existing market enhances overall efficiency, so does the price sequencing become completely unpredictable and random (Lo, 2007:17). As Shiller (2013) provides, though humanity continues being influenced by past global occurrences in the market arenas, this does not in any way remove the presence of existing market anomalies. The fact that the South American state of Colombia continues experiencing a real-estate bubble, which is ongoing, is representative of the volatility of the current market sector. With its real-estate pricing index rising by 69%, in terms of inflation-adjusted calculations, it provides a crucial insiders’ view of how market inefficiency continuously evolves. Rationality in individuals’ participation in various economic bubble s is educated by amongst others, the price increases as a result of the prevailing psychological contagion. It is this fundamental human aspect, which promotes a given mindset of justifiable price increases, thereby spurring fervent market activities. Due to the inherent nature of