Introduction
The financial crisis is the product of the commodity economy. Since the financial crisis of 20th century 30s, the financial crisis always exists, but also appears cyclical in nature. With the development of globalization, close links between the states, advance of technology, and the impact of financial crisis is becoming increasingly wide-ranging; what's more, the degree is deeper and deeper. This paper overviews the financial crisis of 207-09, and outlines the EMH theory, based these analyses the Efficient Markets Hypothesis (EMH) within the context of the financial crisis of 2007-09, and discuses behavioral finance offers alternative explanations that might be better able to explain investor decision-making and pricing in financial markets.
Backgrounds: the financial crisis of 2007-09
Financial crisis, also known as the financial crisis (The Financial Crisis), refers to a country or several countries and regions all or most of the financial indicators (such as: short-term interest rates, monetary assets, securities, real estate, land prices, commercial bankruptcy number and the number of financial institutions out of business) and a sharp, short and super-cycle deterioration. The type of financial crisis can also be divided into a currency crisis, debt crisis, banking crisis and other types. The financial crisis in recent years has increasingly presented a mixed form of crisis.
Financial crisis of 2007-09, also known as the global financial crisis, the global financial crisis, the sub-prime crisis, credit crisis, and was even known as the financial tsunami and the Wall Street financial crisis and was the financial crisis that began to surface in the August 9, 2007. Since the subprime housing credit crisis, investors began to lose confidence in the value of mortgage-backed securities, causing a liquidity crisis. Even if the multi-national financial markets, the central bank repeatedly inject huge amounts of money, it can not prevent the outbreak of the financial crisis. Until 2008, the financial crisis began to get out of control and lead to a number of very large financial institutions fail or the government to take over.
The Efficient Markets Hypothesis (EMH)
In 1965, Eugene • Fama published article Random Walks in Stock Market Prices in the Financial Analysts Journal. In this article, it was first mentioned the concept of the Efficient Market, Effective market is a market that there is a large number of rational, profit-maximizing investors who actively participate in the competition, everyone tries to predict a single stock futures market prices, everyone can easily access the current important information. In an efficient market, competition among the large number of sophisticated investors, led to such a situation: at any time, individual stock reflecting the market price has occurred and has not yet happened, but the market is expected to happen.
In 1970, France Marti proposed the efficient market hypothesis, the definition as: If in a stock market, prices fully reflect all available information, then this type of market called an efficient market.
There are two signs measuring whether the external efficiency of the securities market: first, whether the price of freedom to change is in accordance with the relevant information. Second, whether the information about the securities are fully disclosed and evenly distributed, so that each investor at the same time, to be equal and other qualitative information. Under this assumption, investors will be buying and selling stocks quickly and effectively exploit potential of information. All the known factors that influence a stock price already reflected in stock prices, so according to this theory, technical analysis of stock is invalid. There are three forms of this hypothesis:
weak-form EMH, semi strong-form EMH, strong-form EMH.
weak-form EMH
This hypothesis assumes that in the circumstances of weak-form efficiency, the market price fully reflect all the past history of securities pricing information, including the stock transaction prices, trading volume, the amount of short selling, financing and amount of money.
Corollary 1: If the weak-form efficient market hypothesis was established, then the role of technical analysis of the stock price is lost, fundamental analysis may help investors to reap excessive profits.
semi strong-form EMH
This hypothesis suggests that prices have fully reflected all the public information about business prospects of the company. This information concludes traded price, volume, earnings data, earnings forecasts, corporate governance conditions, and other public disclosure of financial information. If investors are able to quickly obtain this information, stock prices should quickly respond.
Corollary 2: If the semi-strong form efficiency hypothesis established, in the market, the use of technical analysis and fundamental analysis will be useless, but people may get the excess profits from the insider information.
strong-form EMH
Strong-form efficient market hypothesis believes that the price fully reflects all the company's operation information, which includes public or internal unpublished information.
Inference 3: In the strong-form efficient market, there is no way to help investors to reap excessive profits, even if the funds and insider information are the same.
Usefulness of the EMH within the context of the crisis
In an efficient market the asset prices fully reflect all the information of the current market participants possess and market expectations, therefore, today's price change can only be caused by today's information, so in the effective market, asset prices change is unpredictable. According to the efficient market hypothesis, investors are rational economic man, they are in order to maximize earnings on the investment. As a result, people will go to keep abreast of information through different ways and means to access to information and ultimately make the best choice. The financial crisis is triggered by U.S. housing bubble, and usefulness of the EMH is reflected by the following aspects:
(1)the loose monetary policy has provided favorable conditions for investors.
U.S. financial regulatory authorities, especially the Fed's monetary policy during the past period change from tight to loose. We know that from the beginning of 2001 the U.S. federal funds rate by 50 basis points since the Fed's monetary policy has started to shift from the hike rate cut cycle. Interest rates are13 times lower since then, after that in June 2003, the federal funds rate is down to 1% over the past 46 years to reach its lowest level since. Loose monetary policy environment is reflected in the real estate market, which is mortgage interest rates fell. 30-year fixed mortgage rate by the end of 2000 is from 8.1% in 2003 to 5.8%; one-year adjustable rate mortgage loan interest rate is to 7.0% from the end of 2001, down 3.8% to 2003.
Continued decline in interest rates at this stage drive the 21st century real estate since the United States continued prosperity. Because of declining interest rates, a lot of high-risk of financial innovations in the housing market has created the possibility and expansion opportunities. One manifestation is the floating-rate loan and pay interest only loans become very popular, accounting for the proportion of the total issuance of mortgage loans is rising rapidly. Compared with the fixed interest rate, these innovative forms of financial loans to home buyers only require a lower monthly responsible, flexible repayment amount. In this way, from the surface, it is reducing the pressure on buyers, supporting the prosperity of the situation over the past consecutive years.
(2) The interests of the rational pursuit
As we all know that in the 21st century, the world economic and financial globalization, increased long-term decline in global interest rates, the dollar depreciation, and asset prices, so that mobility within the framework of the expansion in the world to stimulate the pursuit of high returns, ignoring the risk of financial popular varieties and investment behavior. For the purchase of the original mortgage loan lender, and resale of loans sold to investors in the securities of packaged investment products, sub-prime mortgage derivatives have an objective return on investment space. In a low interest rate environment, this enables investors to obtain a higher return, which attracted more and more investors.
The influence of U.S. financial markets and open markets has attracted investors not only from the United States, but also from other parts of Europe and Asia, making the demand even more prosperous. Face to huge demand for investment, many mortgage institutions cut the loan conditions to provide more sub-prime products. In fact, not only the United States, including Europe and Asia, and even China, including the world's leading commercial banks and investment banks are involved in the U.S. sub-prime mortgage derivatives investments.
In this round of prosperity of the United States sub-prime mortgages, some banks and financial institutions use the opportunity that mortgage securities can be transferred to investors, has intention or no intention of reducing loan credit threshold. In the past few years, the United States was once down-payment home loans rate year after year. The history of the standard home loan down payment amount is 20%, it was once reduced to zero or even negative down payment.
