Market Efficiency after the Financial Crisis: It's Still a Matter of Information Costs

• Main Authors: Gilson, Ronald J., Kraakman, Reinier
• Format: Text
• Language: unknown
• Published: Scholarship Archive 2014
• Subjects: efficient capital market hypothesis; financial crisis; subprime crisis; financial regulation; Virginia Law Review; Banking and Finance Law; Law; Law and Economics; Sturm; Iceland
• Online Access: https://scholarship.law.columbia.edu/faculty_scholarship/894; https://scholarship.law.columbia.edu/context/faculty_scholarship/article/1941/viewcontent/Gilson___Market_Efficiency_after_the_Financial_Crisis.pdf

Contrary to the views of many commentators, the Efficient Capital Market Hypothesis ("ECMH"), as originally framed in financial economics, was not "disproven" by the Subprime Crisis of 2007-2008, nor has it been shown to be irrelevant to the project of regulatory reform of financial markets. To the contrary, the ECMH points to commonsense reforms in the wake of the Crisis, some of which have already been adopted. The Crisis created a lot of losers – from individual investors to pension funds and German Landesbanken – who purchased mortgage-backed securities that they did not, and perhaps could not, understand, and it cost them extraordinary amounts of money as a result. Perhaps more significantly, the knock-on effects of the Subprime Crisis rippled through the finance markets, pushed Lehman Brothers over the edge, decimated other financial institutions across the world, and resulted in massive provisions of government assistance and sometimes the full nationalization or failure of financial institutions and even giant industrial enterprises such as General Motors and Chrysler. Moreover, the damaging consequences of the Subprime Crisis continue. America's recovery is fragile. The Great Recession of 2008-2010 is also the backdrop for Europe's sovereign debt and banking crisis that still lingers today. Some smaller European nations – including Greece, Iceland, Ireland, and Portugal – required large international aid packages, and even larger countries such as Italy and Spain were at risk of default prior to decisive intervention by the European Central Bank. The resulting pressure to slash government spending threatens political stability across Europe. The recent political Sturm und Drang in the United States over budget deficits and debt limits reflects similar sharply divided views about the causes and policy implication of the Crisis. Against this backdrop, one might think it of small consequence that the Subprime Crisis is also said to have dealt major setbacks to academic theories, most particularly the ECMH. ...