Posted on by John Sloman

Rational lemmings?

From October 2007 to March 2009, stock markets around the world fell massively. In the UK, the FTSE 100 fell from a peak of 6752 on 15 October 2007 to a trough of 3461 on 9 March 2009 (a fall of 49 per cent). By the end of August 2009 it had reached 4944 (a rise since March of 43 per cent). Does this mean that the March value represented an over-correction downwards? Did the subsequent rise represent an over-correction upwards? Are stock markets about to plummet? The following two articles reflect on the past and look into the future!

World Wide Stock Market Crash on Pause The Market Oracle (3/9/09)
Are shares about to fall off a cliff? BBC News (4/9/09)

Questions

  1. What is meant by the ‘efficient (capital) market hypothesis’?
  2. If stock markets are overvalued, does this mean that they are inefficient?
  3. Why might (a) stock markets plummet in the near future; (b) carry on rising? Why don’t the ‘experts’ know which will happen?
  4. Explain why markets may over-shoot their long-term equilibrium value?