The essence of predictions and stock market efficiency.

stock market efficiency.
In 1970, economist Eugene Fama developed the theory of efficient market hypothesis.

The random walk theory attempts to analyse/explain this type of situation. It  states that stocks take a random and unpredictable path and that it’s impossible to predict the future movement of a stock price or market based on its past trends. Unlike those such as Bachelier, followers of the random walk theory believe that one must assume a high level of additional risk whilst trying to outperform the market . This is  as a result of the stock market having an extremely unsystematic pattern over a period of time when events affecting the market occur. Value investors’ theory is more or less the total opposite of Fama’s. They make their money by predicting when stocks can become undervalued then purchasing them and selling them once their prices have risen and got to the stage which one can describe as ‘overvalued’. Bachelier diplomatically explains how most brokers/ those working in the market take action with regard to the fluctuation of the market. 

When creative director of Christian Dior, John Galliano caused outrage because of his drunken, racist comments in early March 2011, the main perception was that stock prices of Dior would become undervalued or at least fall.  However, some believed that this event wouldn’t affect such a large fashion label and that prices would stay stable. The table below shows how stock prices changed from June 2010 onwards.

When creative director of Christian Dior, John Galliano caused outrage because of his drunken, racist comments in early March 2011, the main perception was that stock prices of Dior would become undervalued or at least fall.  However, some believed that this event wouldn’t affect such a large fashion label and that prices would stay stable. The table below shows how stock prices changed from June 2010 onwards.

When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform, or beat, the market.

 

Figure 1: Graph sourced from http://www.4-traders.com/CHRISTIAN-DIOR-4629/consensus-/.

From this graph, we can come to the conclusion that prices for Dior fell to €93 from February to March 2011 (the time of the scandal). This was much lower than the target price which proves that sometimes, one cannot predict these things very accurately. It also degraded market efficiency. One can say that this event played a major part in this. Prices generally increased from April 2011 to mid July 2011. Obviously there were many reasons for this but in my opinion, one of the main factors was that the Dior scandal was ‘hushed’ and John Galliano was fired from his position as creative director for Dior which helped the fashion house regain their dignity and value. Unfortunately, the prices decreased massively after mid July 2011 to September 2011 (but remained relatively stable at the end of August that year) whilst analyzing this, it is important to consider the fact that Galliano’s trail and verdict was then. Despite no longer working for Dior, Galliano was still associated with the label. However, prices gradually increased after that. I personally believe that one of the main reasons was that the whole ‘issue’ was forgotten about and Dior was recognised again for what it is, a fashion label. The reason for this example was to highlight how bad publicity/events can affect the actual price of shares in a company.