Efficient Market Hypothesis Proposed By Fama

1474 Words6 Pages
1. Introduction and literature review 2
2. Methodology and Data 6
3. Conclusion 7

1. Introduction and literature review
Efficient market hypothesis proposed by Fama (1965) suggested that all relevant information is immediately incorporated into current stock prices. Moreover, stock prices change when new information come. Since new information is unpredictable, EMH implies that stock prices follow a random walk.
Fama(1970) presented 3 forms of market efficiency including weak form , semi- strong form and strong form. These forms represent respectively level of information that cannot be employed to give prediction on future prices ( past information, public information and private information ). At weak form of market efficiency, Fama argued that past data of stocks are almost useless to predict future prices of stocks. However, recent evidences have claimed that stock market was even inefficient at weak form. For example, the evidence of long term reversal presented by De bondt and Thaler (1985) ; relative strength of stock price discovered by Jagadeesh and Titman (1993) . These two paper has been considered to be the most compelling arguments against weak form of market efficiency.
While profitability of contrarian strategies were well captured by rational models ( three –factor model by Fama and French 96, hart et al 2003 ) as well as behavioral model, profitability of momentum strategies have been a puzzle in literature research. Of
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