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Chapter 7: Q.20 (page 210)

In the late 1990s, as information technology advanced rapidly and the Internet was widely developed, U.S. stock markets soared, peaking in early 2001. Later that year, these markets began to unwind and then crashed, with many commentators identifying the previous few years as a 鈥渟tock market bubble.鈥� How might it be possible for this episode to be a bubble but still adhere to the efficient market hypothesis?

Short Answer

Expert verified

The improvement of technology was the major reason for the increase in the stock price of the US stock market, while the decline was caused by the subprime crisis that occurred in 2008.

Step by step solution

01

Stock market : 

A market where businesses may register and sell long-term debt and securities to the general public.

02

Explanation : 

The improvement of technology was the major reason for the increase in the stock price of the US stock market, while the decline was caused by the subprime crisis that occurred in 2008.

The crisis has a detrimental influence on the economy, resulting in a drop in company dividend growth. A low denominator suggests a low dividend growth rate, which leads to a drop in the stock price. The decline in company stock prices produced market uncertainty, and the subprime crisis occurred in 2008as a result of credit spreads, and the US stock market fell as a result.

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Most popular questions from this chapter

Suppose that in every last week of November stock prices go up by an average of 3%. Would this constitute evidence in favor of or against the efficient market hypothesis?

鈥淎n efficient market is one in which no one ever profits from having better information than the rest of the market participants.鈥� Is this statement true, false, or uncertain? Explain your answer.

Suppose that you are a trader at the stock market. T-Mobile鈥檚 stocks currently trade at $45and the expected return is 9%. You have information that leads you to believe that by the end of year the company鈥檚 returns will be around 40%. Are your expectations optimal? How will your behavior influence the stock price?

The Internet is a great source of information on stock prices and stock price movements. Yahoo Finance is a great source for stock market data. Go to http://finance .yahoo.com and click on 鈥淢arkets,鈥� then 鈥淲orld Indices,鈥� and then the DJI symbol to view current data on the Dow Jones Industrial Average. Click on the chart to manipulate the different variables. Change the time range and observe the stock trend over various intervals. Have stock prices been going up or down over the past day, week, three months, and year?

Firms in a perfectly competitive market are said to be 鈥減rice takers鈥濃�攖hat is, once the market determines an

equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market,

but you are not happy with its price, would you raise the price, even by a cent?
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