|By Mihalek, Paul|
The recent U.S. financial crisis, the U.S. stock market crash of 1987, and other recent anomalies have seriously challenged Fama's classic efficient capital markets hypothesis. These events have made it likely that future capital markets research will be enriched by the important role that human behavior plays in the success or failure of the financial markets. This paper examines the factors causing the recent crisis within
Keywords: Financial Crisis; Efficient Market Hypothesis; Behavioral Finance
The financial crisis in the U.S. economy in the late summer and early fall of 2008 was so great that it largely overshadowed the presidential election campaign. Each day the media reported new evidence signaling the continuing decline of our financial markets and economy. For example, in a period of a few months beginning in early
WHAT CAUSED THE CRISIS?
Much of the initial deterioration can be attributed to the burst of the housing bubble which caused a domino effect throughout the financial markets. As one "domino" after another fell, the entire financial services segment felt the ripple effect. The media initially characterized the financial crisis during 2007 and 2008 as a "credit crunch" or "credit crisis." This credit crisis began in
In fact, the financial services sector experienced significant growth since the early 1980's, largely due to the introduction of securitization which permits banks to offload credit risk to capital markets and focus on generating fees rather than interest income" (