· A wide look to Efficient Market Hypothesis and the Financial Crisis( What is EMH ,forms of EMH,explain and combine it with the financial crisis) And how do the emotional factors effect in EMH? 5...

EFFICIENT MARKET HYPOTHESS AND FINANCIAL CRISIS
STUDENT NAME:
INTRODUCTION
Financial crisis of 2008-2009 has severely damaged the world wide economies; this
financial crisis has affected the economy of United States and European countries very badly.
The impact was so bad that the unemployment rates increased sharply and in some cases the rate
of unemployment crossed the single digit level, even today most of the economies of United
States and Europe are not able to recover from this shock and are operating below their economic
capacity.
Economic recession in United States started in the second quarter of 2007 and continued
till the first quarter of 2009 as implied by very low or negative quarterly change in GDP during
this period. Faced with this crisis, the United States announced a stimulus package of around
$800 billion which helped the economy to come out of the situation of economic doom and move
to a positive growth path. But this stimulus package along with the economic crisis has worsened
the fiscal situation of the United States as currently our economy is facing “profound budgetary
and economic challenges. At 8.5 percent of gross domestic product (GDP), the $1.3 trillion
budget deficit that the Congressional Budget Office (CBO) projects for 2011 will be the third-
largest shortfall in the past 65 years (exceeded only by the deficits of the preceding two years)”.
Although economic recovery has started and economic output has begun to spend but the
speed of recovery have been very meager and economy still remains in slump as suggested by
low quarterly percentage change in GDP for most of the quarters of 2009 and 2010. Also the
recent crisis in the financial market, European crisis, debt related problems, may contribute in
prolonging the slump. Expectation by Congressional Budget Office suggests that recovery will
continue but the real GDP of the economy will stay well below the potential GDP. Under the
current federal tax and spending policies, there will be substantial restraint on economy in 2013
and CBO predicts that economic growth might slow down before moving up again and will
average at around 3.6% annually from 2013 to 2016. With the expectation of modest economic
recovery for few coming years, the employment will expand slowly and therefore there will be
modest fall in the unemployment rate over next few years.
The effect of recession has magnified more due to the high indebtedness of the
consumers, financial institutions and government. Due to high level of indebtedness the
recession became more persistent leaving limited fiscal policy responses of government
throughout the world. Foundation of market-efficiency hypothesis theory was also shaken by the
financial crisis of 2008-2009. As per the efficient market hypothesis the financial market are
efficient, this hypothesis is being criticized by many financial writers and economists due to the
financial crisis faced by the economies.
Many of the writers such as Robert Shiller, Justin Fox, Jeremy Grantham, Paul Krugman
has provided various articles related to the myths about the efficient-market hypothesis theory.
According to the writers efficient-market hypothesis is one of the biggest reasons for the
financial crisis of...