Question

Comment on the following statement: “If financial markets are efficient, how could investors have gotten things so wrong as far as housing and securitization markets are concerned.”

Answer 1

Financial markets are never efficient completely. It can be said to be semi- strong form of market because all the public information have already been discounted but the privately available information have not discounted as there are a lot of the scope for the insider trading, and there have been instances where people are always insider trading, and they are also reporting the financial statement by amending it according to their advantage

As far as housing and securitization market are concerned,there was complete inefficiency on the part of the regulatory authorities and investment banker who inflated the prices of real estates to such an extent and they also managed a nexus of mismanagement of those securities as investment grade, so when the market collapse, it lead to a contagion, it can be said that there was complete inefficiency and fraud and misappropriation of the books of accounts.

It can be said market are never efficient completely and investors are not always rational, so these are highly theoretical concepts in practical life there is a lot of difference in application.