The Efficient-market Hypothesis (EMH) and Financial Crisis

Abstract

The severity and amplitude of the recent global crisis provide convincing evidence that there is something fundamentally wrong with the prevailing theory on how financial markets work and with the approach to market regulation that has accompanied it. Understanding what has happened and what should be done to avoid such a catastrophic crisis in the future will require a new way of thinking about how markets work. The key point analysed in this chapter is the efficient-market hypothesis (EMH) and its accounting corollary, the mark-to-market principle.