Efficient Market Hypothesis

1641 Words Apr 26th, 2008 7 Pages
Efficient Market Hypothesis
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
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This statement assumes that the stocks can reach their intrinsic value everyday assuming that there are full information and no market failures. Jensen’s statement allows investors to speculate about the market. Being able to speculate about the market is good because it allows more trading and speculation resulting in a more efficient market. Sources refuting the efficient market hypothesis Over time as people began to analyze the efficient market hypothesis it appears that several anomalies in the capital market were discovered. One of the anomalies discovered was the January Effect. According to Kolahi (2006), Rozeff and Kinney were the first to observe the January Effect anomaly. In the January Effect it was discovered that the return on common stocks were especially high during January compared to other months. The way that the January Effect works is that investors would sell their small cap stocks at the end of the year to write off their losses during the end of December and the first week of January. This effect went against the EMH because the EMH states that the stock prices cannot be predicted but the January Effect proved otherwise. There were many arguments made against the efficient market hypothesis by Grossman and Stiglitz. “Grossman and Stigliz argued that perfectly efficient markets could only exist if there was no cost to

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