How Do Financial Crises from 1981 to 2015 Affect US Stock Market Efficiency - Dissertation Example

The paper "How Do Financial Crises from 1981 to 2015 Affect US Stock Market Efficiency?" is a perfect example of a dissertation on finance and accounting. The efficient market hypothesis put forward by Fama (1970) forms a fundamental basis for the analysis of the impacts of financial crises on the stock market efficiency. In efficient markets, it is hypothesized that the prevailing stock prices fully reflect all the latest information that is available. Therefore, the reflection of all the available news by the prevailing stock prices means that each stock is always trading at its intrinsic value. However, the occurrence of financial crises and economic bubbles that affect the stock exchange tends to highlight weaknesses in the efficient market hypothesis.  This paper attempts to argue against the efficient market hypothesis by empirically showing that the stock market tends to react to drastic economic changes, particularly, the recent major financial crisis; the great recession of 2007-2009. Therefore, the objective of this paper will be to investigate the effect of the financial crisis of 2007-2009 on the validity of the weak-form efficient market hypothesis.  The efficiency of the markets is determined by using the Generalized Hurst Exponent method. The Hurst exponent methodology was estimated by using the rolling windows technique. The study investigated the S&P 500(GSPC), Dow Jones Industrial Average (DJIA), and the NASDAQ Composite Index (IXIC). The study found that the markets showed signs of inefficiency before and after the financial crisis.

1.0. Introduction
1.1 Background

The practicability of the theory of market efficiency has been a key subject by many researchers of the stock market. The term stock market efficiency refers to a phenomenon where the prices are dependent on the available information. The term was first coined by Fama (1970), who defined it as a situation where the prices of shares in the capital markets adjust upon the introduction of new information. In this case, the efficiency of the market depends on the degree of assimilation of information, the time taken to assimilate the information, and the kind of information that is adopted (Sharma and Anil, 2011). Market efficiency can be categorized into weak form, semi-strong form, and strong form.