Question

Discuss how efficient the U.S. financial markets are in pricing financial securities. Consider such questions as, "Are security prices reliable?", "What factors promote or reduce pricing efficiency?", and "How can we account for significant pricing fluctuations?

Answer 1

Discuss how efficient the U.S. financial markets are in pricing financial securities. Consider such questions as, "Are security prices reliable?", "What factors promote or reduce pricing efficiency?", and "How can we account for significant pricing fluctuations?

The US stock market crash of 1987, dot-com bubble of 2000 and the financial market meltdown in 2008, are few of the indicators of successful investing - the occurrence of market anomalies, and the emerging of financial behaviorists, increased interest in market efficiency. Market crashes or bubbles and emerging Investing behaviors in multiple securities are the evidences against market efficiency. A market would be efficient and strong enough for pricing of securities (e.g., equities) reflected in available information (public and private), where Insider trading is kept under check to take undue advantage of the actual financial condition of the market. Occurrence of any type of economic, social or natural events (e.g., unexpected changes in interest rates, social unrest, or an earthquake) that may affect the profitability of a firm provides direction to the market. Additionally, the price of a security reflects the value of firm-specific or economic events that may occur or have occurred in the past and that had material effect in the company profits.
Fortunately, the success of skilled U.S. investors has been based mostly by assessing correctly the fundamental or fair value of firm’s stock price relative to its market price which is determined by supply and demand. All other factors and events discussed drive the market in such a way that offers fair valuation of the securities traded within the financial system aftermath a slump or unconditional hype in the price of securities. Market Correction has been playing an important role in presenting the securities at fair value to the Investors.
Security prices are reliable and presented fairly to each of the Investor category within a particular securities’ market.
Pricing efficiency is determined by the market direction and the considerable risk free return over a period of time.
Significant price fluctuations mainly occur due to reforms or by any type of economic, social or natural events (e.g., unexpected changes in interest rates, social unrest, or an earthquake) that may affect the profitability of a firm provide direction to the market.