A Theory Of The Efficient Market Hypothesis

1635 Words Aug 19th, 2015 7 Pages
The main idea of market efficiency reflects that all the information which is associated with stock market is basically showing on the stock process in any time. It appears that the stock prices are unpredictable because the random changing of the new information affects it. Under the circumstance of that the French mathematician Bachelier (1900) first came up with the idea about that random information results to the unpredictable prices in marketing concept. After that Osborne (1964) brought a theory of random walk, and then accomplished by Fama (1965). Since the day of creation of market efficiency, it has been criticised by researchers all the time; but it still has significant impact on financial field. In 1970, Fama developed the theory of the efficient-market hypothesis (EMH), which stated that it is impracticable to outperform the market. The market efficiency mainly divided into three forms, there are: weak, semi-strong, and strong form market efficiency. The division based on how information affects the stock price.

Since the EMH has great influence on both investor and stocking firm; therefore, practicing it in business should be the priority. In practical perspective, some people might believe in strong form market efficiency, but it is hard to reach the ideal environment. However, after some test such as Variance ratio test by MackKinlay, Phillips Perron unit root test, and Cumby-Huizinga autocorrelation test; it seems that the weak form market efficiency may…

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