The Titanic: A Test of the Efficiency of U.S. Capital Markets
The effectiveness of the stock markets involves the investigation of how much, how fast, and how accurately the available data is incorporated into security prices. Financial economists classify the efficiency of capital markets into different categories based on the meaning of available information on security prices. Empirical evidence from the study of the 1912 sinking Titanic ship and its effects to the International Mercantile Marine Company, its parent firm, is constructive in the perception of the efficiency of capital markets. The effectiveness of the U.S. stock markets is, therefore, analyzed through the study of the theories in the economics literature about the Titanic.
IMM and the Titanic
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The sinking of the Titanic ship in 1912 had a great impact on the company constructed the ship, a representation of the whole economy. The tumbling of the liner may be regarded as a crashing of the stock of the company and its recovery has not been less dramatic than that of the rest of the market. The formal efforts of the IMM Company after the sinking of the Titanic brings an idea of a strong capital market of the United States as a legitimately debatable issue. In many ways, the existing culture of the U.S. acts as if financial analysts proved the state of the market several decades ago. Sensibly, a gulf has developed between the current economics literature and the persistent conception regarding market efficiency in the legal culture (Khanna, 1998).
Many eminent theorists perceive pricing influences not to be associated with rational expectations about asset values. Alternative models developed by scholars suggest that prices make significant departures from the asset values, which can be related to the Titanic. The IMM, companies involves the release of public information to be used by lawyers and investors as illustrated.
Before the acquisition, stock prices goes up, indicating an act of dishonesty. The early move however, is an indication of strong market efficiency (Goetzmann, 2016).
An efficient capital market is tested when a research on the investment in a market is carried out, and the results reveal that no single investor attains greater profitability or loss than other investors with the same amount of invested funds. An efficient market hypothesis requires equality in the sharing of profits due to the aspect of equal sharing of information. The incidence of the sinking of the Titanic reveals the efficiency of the state of the capital markets in America. Information from a journal on the untold story of the Titanic illustrates that the loss in the stock value was steady with the average loss to the company in charge of the Titanic vessel, the parent company of the Titanic (Goetzmann, 2016).
As illustrated, market participants are obliged to equal possession of information; thus, they can only achieve identical returns. According to the journal, the procedure in the calculation of the impact of the Titanic sinking on the market value is a test that apparently qualifies to ascertain the competence of capital markets of the United States of America.
An efficient capital market is composed of investors who are of equal mutual relation. No investor is entitled to beat the market. An efficient capital market is also defined by the availability and accuracy of information about the securities and their prices. The calamity that hit the Titanic ship in 1912 was a chance to determine the efficiency of the Capital markets of America during the century. Information obtained from the study is significant enough to be used in the current investment community.
Goetzmann, W. (2016). An Introduction to Investment Theory. Viking.som.yale.edu.
Retrieved 17 March 2016, from http://viking.som.yale.edu/will/finman540/classnotes/class8.html
Khanna, A. (1998). The "Titanic": The Untold Economic Story (5th ed., pp. 16-17). CFA
Institute. Retrieved from http://www.jstor.org/stable/4480105
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