A Theory Of The Efficient Market Hypothesis

Capital markets provide a function which facilitates the buying and selling of long-term financial securities to increase liquidity and their value, Watson & Head (2013). Hence, the Efficient Market Hypothesis (EMH) explains the relationship that exists with the prices of the capital market securities, where no individual can beat the market by regularly buying securities at a lower price than it should be. This means that in order to be an efficient market prices of securities will have to fairly and fully reflect all available information, Fama (1970). Consequently, Watson & Head (2013) believe that market efficiency refers to the speed and quality of how share price adjusts to new information. Nevertheless, the testing of the efficient markets has led to the recognition of three different forms of efficiency in which explains how information available is used within the market. In this essay, the EMH will be analysed; testing of EMH will show that the model does provide strong evidence to explain share behaviour but also anomalies will be discussed that refutes the EMH. Therefore, a judgment will be made to see which structure explains the efficient market and whether there are some implications with the EMH, as a whole.

As a future business leader, I chose to read the book “The mind of the Market” by Michael Shermer When I first purchased this book I didn't know what to expect, I just knew that I had a series of questions from my macroeconomics, sociology, and history class that would like to explore.

It is believed that Efficient Market Theory is based upon some fallacies and it does not provide strong grounds of whatever that it proposes. More importantly the Efficient Market theory is perceived to be too subjective in its definition and details and because of this it is close to impossible to accommodate this theory into a meaningful and explicit financial model that can actually assist investors in making the investment decisions (Andresso-O’Callaghan, B., 2007).

As Chapter 10 questions, if further evidence continues to surface that capital markets do not always behave in accordance with the efficient market hypothesis, then should we reject the research that has embraced the EMH as a fundamental assumption? In this regard we can return to earlier chapters of this book in which we emphasised that theories are abstractions of reality. Capital markets are made of individuals and as such it would not (or perhaps, should not) be surprising to find that the

The Efficient-Market Hypothesis (EMH) states that it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Under the idea that markets are efficient, stock prices reflect new information quickly and accurately. Furthermore, Morningstar (n.d.) contributes details on the strongest supportive theory of efficient markets, EMH exists in three forms: weak, semi-strong and strong. The hypothesis calls for the existence of informationally efficient markets, were current stock prices reflect all information, and attempts to outperform the market will only come in the form of riskier investments. Also, because of a large number of independent investors actively analyzing new information simultaneously as it enters the market, investors react accordingly and is immediately reflected in the stock

In the efficient market everyone make a decision based on the information they have got. In the real circumstances, there is an agency problem so the agents know more information than the shareholder, so they make high investment and make abnormal profit. This is known as a corporate fraud. If the investors find out about this the fraudulent activity then this cause to stop the investments in particular sector. This lead to decrease share price in particular sector. If the price gone up this means that market is in-efficient.

The efficient markets hypothesis (EMH) is a dominant financial markets theory developed by Michael Jensen, a graduate of the University of Chicago and one of the creators of the efficient markets hypothesis, stated that, “there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Markets Hypothesis” [Jensen, 1978, 96]. This paper analyzes whether it is possible to measure if markets are efficient in the strong form of EMH. A generation ago, the efficient market hypothesis was widely accepted by academic financial economists; for example, Eugene Fama’s (1970) influential survey article, “Efficient Capital Markets.” It was generally believed that securities markets were

Another concern relates of insider trading of market efficiency of stock market. In his classical study Fama (1970) proposes efficient market Hypothesis, which suggests that stock price reflects all available information (historical price, public and private) in

When establishing financial prices, the market is usually deemed to be well-versed and clever. In a stock market, stocks are based on the information given and should be priced at the accurate level. In the past, this was supposed to be guaranteed by the accessibility of sufficient information from investors. However, as new information is given the prices would shift. “Free markets, so the hypothesis goes, could only be inefficient if investors ignored price sensitive data. Whoever used this data could make large profits and the market would readjust becoming efficient once again” (McMinn, 2007, ¶ 1). This paper will identify the different forms of EMH, sources supporting and refuting the EMH and finally

Efficient Market Hypothesis has been controversial issues among researcher for decades. Until now, there is no united conclusion whether capital markets are efficiency or not. In 1960s, Fama (1970) believed that market is very efficient despite there are some trivial contradicted tests. Until recently, both empirical and theatrical efficient market hypothesis was being disputed by behavior finance economist. They have found that investor have psychological biases and found evidences that some stocks outperform other stocks. Moreover, there are evidences prove that market are not efficient for instance financial crisis, stock market bubble, and some investor can earn abnormal return which happening regularly in stock markets all over the world. Therefore, the purpose of this essay is to demonstrate that Efficient Market Hypothesis in stock (capital) markets does not exist in the real world by proofing four outstanding unrealistic conditions that make market efficient: information is widely available and cost-free, investor are rational, independent and unbiased, There is no liquidity problem in stock market, and finally stock prices has no pattern.

Many researchers have tested the validity of the semi-strong form of the Efficient Market Hypothesis through testing major announcement event such as dividend announcements and bonus issue announcements. (Khan and Ikram, 2010), This is because the announcements may offer desirable factors to the market which will influence stock prices. Observing the performance of mutual funds and brokerage companies is the second aspect for evaluating the semi-strong form of market efficiency (Khan and Ikram,2010). This is because brokers and fund managers are believed to have access to non public information that gives them an advantage when trading on the stock market.

The weak-form efficiency cannot explain January effect. In semi-strong-form efficient market, to test this hypothesis, researchers look at the adjustment of share prices to public announcements such as earnings and dividend announcements, splits, takeovers and repurchases. As time goes, later tests tend to be not supportive to EMH. For instance, semi-strong-form efficiency cannot explain the pricing/earning effect. In strong-form efficiency, the highest level of market efficiency, Fama (1991) pointed out the immeasurability of market efficiency and suggested that it must be tested jointly with an equilibrium model of expected. However, perfect efficiency is an unrealistic benchmark that is unlikely to hold in practice.

The main objective of this article is to summarize, evaluate, and offer a critical view on the paper of Baker & Wurgler (2007). The first section presents a review of article, the second discusses our main criticism on the econometric methodology, the third analyses predictive power of investor sentiment, and finally the conclusions.

The Efficient Market Hypothesis was established by many researchers in the past over the time span of more than thirty years [Raaschou & Segell (1998), Fama & French (1996), McQueen, et. al, (1996), Ikenberry, et. al,(1995), Malkiel (1995), Brown & Goetzmann (1995), Goetzmann & Ibbotson (1994), Jegadeesh & Titman (1993), Elton, et. al,(1993), Chopra, et. al,(1992), Seppi (1992), Lee, et. al,(1991), Bernard & Thomas (1990), Harris (1989), Ippolito (1989), Shevlin et. al,(1984), Charest (1978), Moore (1964)].