Different Forms Of Market Efficiency

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In this essay, we will look at the different forms of market efficiency; these include weak-form efficiency, semi-strong-form efficiency and strong-form efficiency. I will then discuss the anomalies of this theory and apply it to the efficient market hypothesis and look at the potential implications that this can have on the efficient market hypothesis (EMH). The EMH is a theory that stated it was impossible to beat the stock market; the reasoning behind it was that the stock market efficiency causes all existing share values to always include and reflect all relevant information. The theory states that all stocks trade at the fair value on all stock exchanges, therefore making it impossible for prospective investors to purchase stock which may be undervalued and then sell for an inflated price.
Weak-form efficiency claims all past prices of a stock are reflected in today’s stock value. There are various implications that weak form efficiency has on efficient market hypothesis, the forecasts provided by the chartists and technical analysts will not be massively profitable on most occasions. This is because chartists use chart patterns on past prices of a security to forecast future price changes in financial market. However, Weak-form efficiency tells us that past prices of securities are independent to the future prices therefore meaning that the history of the prices will have no effect on the future stock values, which will mean that the patterns will not be accurate.

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