Question

Some people argue that the efficient market hypothesis cannot explain the 1987 market crash or the high price-to-earnings ratio of Internet stocks during the late $1990 \mathrm{~s}$. What alternative hypothesis is currently used for these two phenomena?

Name: Problem 8, Chapter 22: Fundamentals of Corporate Finance
Uploaded: 2021-03-15T18:06:34-08:00
Duration: 6 min 58 s
Channel: Pragya Ahuja
Description: Some people argue that the efficient market hypothesis cannot explain the 1987 market crash or the high price-to-earnings ratio of Internet stocks during the late 1990 s. What alternative hypothesis is currently used for these two phenomena?

   Some people argue that the efficient market hypothesis cannot explain the 1987 market crash or the high price-to-earnings ratio of Internet stocks during the late $1990 \mathrm{~s}$. What alternative hypothesis is currently used for these two phenomena?

Fundamentals of Corporate Finance

Stephen A. Ross;… 11th Edition

Chapter 22, Problem 8

Instant Answer

Solved by Expert Pragya Ahuja

03/15/2021

Step 1

According to this hypothesis, it is not possible to consistently outperform the market by using any publicly available information. However, the 1987 market crash and the high price-to-earnings ratio of Internet stocks during the late 1990s were seen as anomalies Show more…

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Some people argue that the efficient market hypothesis cannot explain the 1987 market crash or the high price-to-earnings ratio of Internet stocks during the late $1990 \mathrm{~s}$. What alternative hypothesis is currently used for these two phenomena?

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Key Concepts

Behavioral Finance

An alternative approach that integrates insights from psychology to explain why market participants might act irrationally. It highlights cognitive biases, heuristics, and social influences that can lead to deviations from rational behavior, resulting in market phenomena like bubbles, crashes, and overvalued asset prices, which the efficient market hypothesis struggles to account for.

Efficient Market Hypothesis

A theory in financial economics asserting that asset prices fully reflect all available information at any point in time, making it almost impossible to consistently earn returns that exceed average market returns on a risk-adjusted basis. This hypothesis is foundational in understanding why traditional models suggest that market movements should follow a random walk, without systematic errors or predictable patterns.

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