Stock Market Efficiency

Does anybody really know the answer to ‘are stock markets efficient’?

After countless hours of research it is safe to say that many authors have so many different views; they believe in efficiency, they do not believe in efficiency, they sometimes believe in efficiency, they can predict the future etc.  So I am going to express my own opinion about stock market efficiency.

In this post I am going to use Volkswagen as a case study example to show my opinion of stock market efficiency. Or lack of it.

Volkswagen are currently at their height of a scandal that has shocked thousands of people in many countries. Their over-polluting cars have been found out after the US Environmental Protection Agency discovered they were emitting up to 40 times, not just 4, FORTY times more toxic fumes than permitted. But could it have been predicted?

New news spreads quicker than wildfire. The graph below shows the share drop the SAME DAY that outrageously high fumes were found in Volkswagen vehicles.

 

This just shows the importance and the magnitude of news and how much news can effect a company’s shares. But does this show an efficient market? In my opinion it does not. To me this graph shows that there is significant inefficiency in the market. It shows that the stock market did not reflect all information before the scandal or else the ‘scandal’ wouldn’t have been so much of a shock to the system. If the stock markets were efficient then the response would not have had as much of an impact to shares, meaning that the line on the graph would stay relatively straight. Is this amount of inefficiency good for markets?

I think that stock markets cannot be predicted; they do not follow patterns and trends within the market. Whatever happens, happens.

Personally, I agree with Kendal (1953) that stock markets follow a ‘random walk’. To me this means that markets can be estimated but they cannot be predicted. Nobody knows what is really going to happen in the future so nobody can say that markets are going to be ‘efficient forever’ or even ‘never efficient’. Stock markets will change when new news enters the market, leaving an element of unpredictability to markets.

Market efficiency can cause many problems for businesses; managers are expected to act in ways which will increase shareholder wealth. Just like Volkswagen tried to do, but their idea failed as they were found out. In fact CEO Martin Winterkorn quit because he couldn’t face his actions!! Headlines in the news found that even the head of Volkswagen, Michael Horn, admitted that he was aware of ‘possible emissions non-compliance’ by the company LAST YEAR! Surely ethics would have been a major impact on this scandal and consequently had an impact on the share price, which altered stock markets.

To conclude this post I am sticking with my opinions on this and I think stock market efficiency will fail to ever be 100% efficient. This is due to the ever changing factors of companies, stocks, shares and news. This is my opinion, what do you think? How efficient do you think stock markets are?

I have included some links below to articles that I think are interesting and relevant to this blog post, check them out if you want to form your opinion on stock market efficiency.

1. http://www.bbc.co.uk/news/business-34324772 
2. http://thismatter.com/money/investments/random-walk-efficient-market-hypotheses.htm
3. http://www.wsj.com/articles/as-volkswagen-takes-heat-car-makers-ads-tout-fuel-efficiency-1443035580

Blog soon. Laura.