Analysis of Capital Market Efificiency and the Efficient Market Hypothesis

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.

The premise of an efficient market is that stock prices adjust accordingly as information is received. The speed and accuracy of the pricing changes are a reflection of the strength of the market efficiency, where in theory a perfectly efficient market will re-adjust prices immediately and precisely with new information. The efficient market hypothesis aligns with beliefs about whether technical and fundamental analyses are useful in making investment decisions or whether a passive approach is appropriate. In a perfectly efficient market, these types of analyses are not able to predict stock price trends (based on market inefficiencies or price abnormalities) which could assist in portfolio positioning or investment management. However, some investors belive that the market pricing is not precise and that there are timing windows and pricing trends that can be identified through analysis of past performance and finding price abnormalities where all information is not correctly reflected in the stock price (Hirt, Block and Basu, 2006).

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.

Last but not least important, an efficient capital market is one in which stock prices fully reflect all available information. However, the paradox is that since information is reflected in security prices quickly, knowing information when it is released does an investor little good. Furthermore, it is impossible to create a portfolio which would earn extraordinary risk adjusted return. As a consequence, all the technical and fundamental analysis are useless, no one can consistently outperform the market, and new

The efficient market hypothesis theory states that it is impossible to “beat the market” because of the stock market efficiency causes the existing share prices to reflect all relevant information. Critically evaluate the above statement with reference to the three forms efficient market hypothesis.

When we invest money into the stock market we do it with the intention 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’. However, market efficiency - championed in the efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, suggests that security prices instantly and fully reflect all available information and that it would not be possible for an investor to make consistent excess profits. When new information

“An 'efficient' market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to

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.

Over time there have been many different theories applied to financial markets which attempt to explain the changes of stock prices and the different trends over time. Investors would often debate whether or not the market is efficient. Put simply, whether or not the market is a reflection of the information made available to the investor at any time. One such theory that attempts to explain the movements and trends of a market is the Efficient Market Hypothesis (EMH). This particular theory was advocated by Professor Eugene Fama back in 1970 and is regarded as the most widely used investment theory. The EMH states that the stock market is informationally efficient where all stocks are accurately priced based on their investment properties and all investors equally possess the knowledge of these properties. The EMH also states that no investor within the market is able to achieve incredible market returns due to the fact that stocks are always priced at their fair value. However, considering the likes of Warren Buffet and his success, this idea doesn’t seem to be true. Therefore, the EMH is considered by many to be fairly inaccurate theory that shouldn’t be applied to financial markets. There can be a lot more said about the EMH however, this article, as I hope you have noticed by now, is to do with fractals. So now let’s look at an alternative theory that investors may prefer to utilize. This theory

Market efficiency is the way in which information is shared and absorbed quickly by the market ensuring stock prices reflect all the available information Atrill (2012).

Developing the efficient market hypothesis introduced by Fama, some contradicting studies were evolved that are called market anomalies which proves some deficiencies within the mentioned hypothesis

The EMH supposes that the capital market should be a level game for all players. Herein, all information consequential to an investor’s decision is incorporated in determination and fixation of share prices. This is irrespective of whether it has been made public or not, as long as any single investor is aware of its existence. As such there is no chance of overpricing or underprizing of shares (Gili, Cheng-few & Basin 2008). With any new information, the change is instantly effected. Prediction, according to the premise, is a mere episode of chance. Today, some of the world’s business moguls have seemingly done the impossible by overtaking the market alteration. This has made them reap great benefits from capital market trading and obviously evoked doubts on the authenticity of this proposition.