Efficient Capital Markets : Theory Section Essay

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Gary Miller ECON 584 Seminar Paper: Theory Section 12-14-16 Introduction Many extensive studies have been conducted on the behavior of stock prices, which has provided a numerous number of theories that propose how prices will change given certain circumstances. The most fundamental theory on the behavior of the stock market was published in 1970 by Eugene F. Fama in his research, titled Efficient Capital Markets: A Review of Theory and Empirical Work. The theory he proposed is referred to as the Efficient Market Hypothesis (EHM) and is considered to be one of the most classical and resilient economic theories. In his work he proposes the securities markets are extremely efficient in a way that information about individual stock prices is reflected across the market so quickly that an investor cannot beat the market, meaning a portfolio comprised of similar risk stocks will generate comparable profits. Furthermore, this theory suggests that stock prices are entirely unpredictable, such that the only relevant information on what the price of a specific stock will be tomorrow is the news that occurs that given day. Within the past few decades countless numbers of research papers have been published that challenge this theory, suggesting that stock prices can be predictable to a certain degree, largely due to elements of behavior and psychology. One of the most popular theories that suggests there exists a predictable pattern of stock price changes, is the concept of
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