Efficient Market Hypothesis And The Effect Of High Frequency Trading

1219 WordsDec 6, 20145 Pages
Efficient Market Hypothesis and the Effect of High Frequency Trading The efficient market hypothesis (EMH) has consistently remained in the forefront of finance theory for decades. As technology has advanced, the ability to assess the efficient market hypothesis has increased exponentially and so have the opportunities to exploit it. Tactics such as high frequency trading and insider trading threaten the dependability of the efficient market hypothesis. EMH is a rudimentary theory that implies the value of an asset is directly correlated or about equal to the intrinsic value of the asset. (Brigham & Houston, 2012) The intrinsic value of a stock is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors (investopedia.com). Investors use this logic to determine whether to buy or sell a stock depending on its perceived value with respect to the intrinsic value. Whether the investor employs an active or passive investment strategy, the EMH is a rational decision making process to ensure a confident investment. The efficient market hypothesis is constantly being analyzed for its validity in the current market. There are a multitude of external factors contributing to the reluctance of relying on the EMH. Specifically, the rise of high frequency trading has significantly called into question the legitimacy of the efficient market. High
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