Financial crisis 2007-2012 Essay Example | Topics and Well Written Essays - 1000 words

Financial crisis 2007-2012 - Essay Example The investments in the mortgage market in US were very lucrative as it offered high returns in short interval of time. More and more numbers of people considered the investments in US mortgage market as an instrument of short term gains. According to efficient market theory, the information flow from the market was such that it influenced not only the borrowers but also the lenders for purchase of housing properties (Harder, 2010, p.59). The policies of the US government also contributed to the flow of market information to the investors suggesting that the investments in the real estate and housing markets of US is likely to produce easy profits in a short span of time. The US government also made the ownership of houses for US citizens as a fundamental right. All these information flow from the markets influenced the investment decisions in the housing markets. Thus investments in the mortgage markets increased with instances of bank lending with open hands. On one hand when the ma rket information influenced the financial decisions, the underlying bubble of crisis was not noticed. Due to assumptions of the efficient market theory, the valuation of the underlying mortgages got overvalued. The banks provided finances for housing loans without adequate check on the credit parameters which led to the entry of huge borrowers who were not creditworthy (Carey and Stulz, 2007, p.44). The weight of bad loans started to increase when the borrowers defaulted in repayment of loans.... The US government also made the ownership of houses for US citizens as a fundamental right. All these information flow from the markets influenced the investment decisions in the housing markets. Thus investments in the mortgage markets increased with instances of bank lending with open hands. On one hand when the market information influenced the financial decisions, the underlying bubble of crisis was not noticed. Due to assumptions of the efficient market theory, the valuation of the underlying mortgages got overvalued. The banks provided finances for housing loans without adequate check on the credit parameters which led to the entry of huge borrowers who were not creditworthy (Carey and  Stulz, 2007, p.44). The weight of bad loans started to increase when the borrowers defaulted in repayment of loans. The valuation of the mortgages fell which were accepted as underlying securities at the time of financing the loans. This led to erosion of value of the company and the sharehold ers which eventually led to financial crisis of 2007-2012. The underlying causes of financial crisis were not reflected in the information flow to the investors that led to bad investments (Palan, 2007, p.25). This establishes the redundancy of efficient markets in explaining the financial decisions. Financial theories and models This part of the study will evaluate several aspects of Efficient Market Hypothesis and Random market Hypothesis. Efficient Market Hypothesis Efficient Market hypothesis is also known as joint hypothesis problem. It declares that the financial market is efficient. According to this hypothesis, an individual cannot