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Financial Market Failures and Systemic Risk
Financial Market Failures and Systemic Risk

... Monetarists often argue that financial market crises are pseudo-crises because they do not have the potential to induce a global contraction of liquidity in the banking system as bank runs do [Schwartz, 1992]. On the opposite side economic historians have a broad view of financial crises [Kindleberg ...
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Efficient-market hypothesis

In financial economics, the efficient-market hypothesis (EMH) states that it is impossible to ""beat the market"" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.The following are the main assumptions for a market to be efficient:A large number of investors analyze and value securities for profit.New information comes to the market independent from other news and in a random fashion.Stock prices adjust quickly to new information.Stock prices should reflect all available information.Financial theories are subjective. In other words, there are no proven laws in finance, but rather ideas that try to explain how the market works.There are three major versions of the hypothesis: ""weak"", ""semi-strong"", and ""strong"". The weak form of the EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-strong form of the EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong form of the EMH additionally claims that prices instantly reflect even hidden or ""insider"" information.Critics have blamed the belief in rational markets for much of the late-2000s financial crisis. In response, proponents of the hypothesis have stated that market efficiency does not mean having no uncertainty about the future, that market efficiency is a simplification of the world which may not always hold true, and that the market is practically efficient for investment purposes for most individuals.
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