Efficient Market Hypothesis Summary

The basis of Efficient Market theory is considered to have a gap in theory and practice that

Efficiency means any action taken to minimize wastes. Efficiency is the capability of producing desired results with a minimum of energy, time, money, materials or other costly inputs.’ It is the measure of speed and accuracy with which work is done. Efficiency is usually measured in terms of the inputs required to generate the outputs.

Productive efficiency occurs when the firm produces its output at the least possible cost per unit. This requires the firm to produce at the minimum point of its long-run average cost curve. Allocative efficiency occurs when the goods that are being produced are the ones consumers most prefer. In order to achieve these efficiencies, firms are required to produce where price (which measures the consumers marginal valuation of the last unit of the product) equals marginal cost (which measures the opportunity cost of using resources to produce the last unit).

What is efficiency? According to Farrell efficiency is production of maximum amount of outputs from given amount of input or alternatively minimum input quantities producing a given amount of output (Farrell, M.J.

Efficient Market Hypothesis has been controversial issues among researcher for decades. Until now, there is no united conclusion whether capital markets are efficiency or not. In 1960s, Fama (1970) believed that market is very efficient despite there are some trivial contradicted tests. Until recently, both empirical and theatrical efficient market hypothesis was being disputed by behavior finance economist. They have found that investor have psychological biases and found evidences that some stocks outperform other stocks. Moreover, there are evidences prove that market are not efficient for instance financial crisis, stock market bubble, and some investor can earn abnormal return which happening regularly in stock markets all over the world. Therefore, the purpose of this essay is to demonstrate that Efficient Market Hypothesis in stock (capital) markets does not exist in the real world by proofing four outstanding unrealistic conditions that make market efficient: information is widely available and cost-free, investor are rational, independent and unbiased, There is no liquidity problem in stock market, and finally stock prices has no pattern.

The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years. “Behavioural finance, however, is now seriously challenging this premise by arguing that people are clearly not rational” (Ross, (2002)). Behavioral finance uses facts from psychology and other human sciences in order to

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

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

2. Efficient Market: Market efficiency has varying degrees: strong, semi-strong, and weak stock prices in a perfectly efficient market reflect all available information. These differing levels,

The classic statements of the Efficient Markets Hypothesis (or EMH for short) are to be found in Roberts (1967) and Fama (1970)

When referring to microeconomics determining the efficiency would including looking at an individual firm to see if the system is allocating resources to the production of goods and services that individuals are purchasing or to ones that nobody wants. If the resources are going toward goods and services that people are purchasing then the firm is efficient. The best way to determine efficiency for macroeconomics is to look at the production possibility curve; any point of the production possibility curve indicates that all resources are put to full productive use in the economy. If there are points outside the curve, they are desirable but unobtainable, and any points inside the curve mean they are obtainable but undesirable; these two situations are

• If the stock market in the United States is efficient, how do you explain the fact that some people make very high returns? Would it be more difficult to reconcile very high returns with efficient markets if the same people made extraordinary returns year after year?

Efficiency is to fulfil the needs and wants of consumers by making optimal use of scarce limited resources. There are several meanings of efficiency and all are linked to how well a market shares scarce resources to satisfy consumers. The two of the terms within efficiency going to illustrate are allocative efficiency and dynamic efficiency.

The popularly accepted theory of how the stock market works is the Efficient Market Hypothesis (EMH) which says that share prices always reflect the available information about the market and the companies in question (Shleifer 2000). The theory tests three assumptions:

Weak-form efficiency claims all past prices of a stock are reflected in today’s stock value. There are various implications that weak form efficiency has on efficient market hypothesis, the forecasts provided by the chartists and technical analysts will not be massively profitable on most occasions. This is because chartists use chart patterns on past prices of a security to forecast future price changes in financial market. However, Weak-form efficiency tells us that past prices of securities are independent to the future prices therefore meaning that the history of the prices will have no effect on the future stock values, which will mean that the patterns will not be accurate.