What really determines prices ???

Here is a very fundamental (and interesting) question to ponder upon, starting with the following graph...


Consider the fluctuation of US$ and JPY in the year 1998, coinciding with the exposition of the burst of real estate market in Japan. The accompanying chart shows the extent of swing. What is can see here is an unprecedented 35% swing in the exchange rate in a duration of just 5 months. This leads to the following major observations :

• As the world’s two largest economies with an emphasis on stringent norms for disclosures, the range of swing (35 % in about 5 months) is of an unbelievable order.
• The exchange rate fluctuations cannot be on the basis of economic performance, since we have seen quick devaluation followed by a sharp recovery.
• This also points to the fact that the markets are not efficient.

Using this as an analogy for the stock market, is it reasonable to assume that :

• There are definite instances of inefficiencies in the market for every stock, irrespective of the size of the float.
• Large investors can still move the market.
• There is a large possibility of market manipulation, in cases of abnormal movement of stocks.
• The sentiment plays a major role in specifying the “perceived real value” in the market.

Gaining an insight into what happened here can possibly give us some insights into the markets...