Efficient Market Hypothesis Essay

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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…show more content…
The last form of the EMH is the strong form and it suggests that "private information or insider information too, is quickly incorporated by market prices and therefore cannot be used to reap abnormal trading profits. Thus, all information, whether public or private, is fully reflected in a security's current market price" (Han, 2008, ¶ 8). This appears to be an unfair advantage because if a manager of an organization has insider information then they are not able to benefit from the information they possess. Sources supporting the efficient market hypothesis Since Fama, coined the efficient market hypothesis researchers have been studying its correlation to the market. "Supporters of the efficient market hypothesis can argue that many seeming violations of the hypothesis are instead examples of the ‘bad model’ problem. Under this interpretation, predictable excess returns represent compensation for risk, which is incorrectly measured by the asset-pricing model being used" (Beechey, Gruen, & Vickery, 2000, ¶ 2). The longer the violations remain unexplained though using the efficient market hypothesis models it will most likely apply increasingly less force. Supporters of the EMH have always responded in many ways. "Supporters of the EMH have responded to these challenges by arguing that, while behavioral biases and corresponding inefficiencies do exist from time to time, there is a limit to

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