Examples Of Efficient Market Hypothesis

Capital markets provide a function which facilitates the buying and selling of long-term financial securities to increase liquidity and their value, Watson & Head (2013). Hence, the Efficient Market Hypothesis (EMH) explains the relationship that exists with the prices of the capital market securities, where no individual can beat the market by regularly buying securities at a lower price than it should be. This means that in order to be an efficient market prices of securities will have to fairly and fully reflect all available information, Fama (1970). Consequently, Watson & Head (2013) believe that market efficiency refers to the speed and quality of how share price adjusts to new information. Nevertheless, the testing of the efficient markets has led to the recognition of three different forms of efficiency in which explains how information available is used within the market. In this essay, the EMH will be analysed; testing of EMH will show that the model does provide strong evidence to explain share behaviour but also anomalies will be discussed that refutes the EMH. Therefore, a judgment will be made to see which structure explains the efficient market and whether there are some implications with the EMH, as a whole.

It is believed that Efficient Market Theory is based upon some fallacies and it does not provide strong grounds of whatever that it proposes. More importantly the Efficient Market theory is perceived to be too subjective in its definition and details and because of this it is close to impossible to accommodate this theory into a meaningful and explicit financial model that can actually assist investors in making the investment decisions (Andresso-O’Callaghan, B., 2007).

As Chapter 10 questions, if further evidence continues to surface that capital markets do not always behave in accordance with the efficient market hypothesis, then should we reject the research that has embraced the EMH as a fundamental assumption? In this regard we can return to earlier chapters of this book in which we emphasised that theories are abstractions of reality. Capital markets are made of individuals and as such it would not (or perhaps, should not) be surprising to find that the

It was previously assumed that economic investors and regulators (agents) utilised all available information and thus market prices were a reflection of this information with assets representing their fundamental value, encouraging the position that agents’ actions were rational. The 2007-2008 Global Financial Crisis (GFC) is posited to have originated from the notion that all available information was utilised, causing agents to fail to thoroughly investigate and confirm “the true values of publicly traded securities,” leading to a failure to register the presence of an asset price bubble preceding the GFC (Ball 2009).

Under the idea that markets are efficient, stock prices reflect new information quickly and accurately. Furthermore, Morningstar (n.d.) contributes details on the strongest supportive theory of efficient markets, EMH exists in three forms: weak, semi-strong and strong. The hypothesis calls for the existence of informationally efficient markets, were current stock prices reflect all information, and attempts to outperform the market will only come in the form of riskier investments. Also, because of a large number of independent investors actively analyzing new information simultaneously as it enters the market, investors react accordingly and is immediately reflected in the stock

In the efficient market no one can make profit by trading information because it’s available on public and new information available as well. In real circumstances arbitrage opportunities are created based on new information and

An efficient market is one in which share prices quickly and fully reflect all available information, where investors are rational, and there are no frictions. Investors determine stock prices on the basis of expected cash flows to be received from a stock and the risk involved. Rational investors should use all the information they have available or can reasonably obtain, including both known information and beliefs about the future. In an efficient market there is “no free lunch”: no investment strategy can earn excess risk-adjusted average returns, or average returns greater than are warranted for its risk (Barberis, 2003). Market efficiency is assessed by determining how well

All neo-empirical accounting research has the underlying assumption of the efficiency of markets – the efficient markets hypothesis (EMH). It is referred to as an “hypothesis” because despite more than forty years of research designed to test the hypothesis all attempts to date have failed to confirm it. Therefore, consistent with the generally accepted process of theory construction which states (simply) that a theory is a confirmed hypothesis, it remains an hypothesis. The EMH emerged in the 1960s from the work of researchers at the University of Chicago trained in economics and finance and working in the areas known as portfolio theory and employing the capital assets pricing model (CAPM). It was then taken up by accountants also working and studying at the University of

Market efficiency requires that security prices react immediately in an unbiased way to the receipt of new information (Robert Shiller S1998). In other words, an efficient capital market is one in which stock prices fully reflect available information. In addition, there are three conditions for market efficiency; information flows freely, market is composed of rational investors where all competing against each other with the objective of maximizing wealth and there is no market imperfections. In efficient market, investors actively compete in the market based upon perceived mispricing derived from an analysis of

Last but not least important, an efficient capital market is one in which stock prices fully reflect all available information. However, the paradox is that since information is reflected in security prices quickly, knowing information when it is released does an investor little good. Furthermore, it is impossible to create a portfolio which would earn extraordinary risk adjusted return. As a consequence, all the technical and fundamental analysis are useless, no one can consistently outperform the market, and new

In Section2, this paper aims to study the three limits to arbitrage: fundamental risk, implementation cost, and most importantly, noise trading risk. Three components of noise trading risk are reviewed: horizon risk, margin risk and short covering risk. Section 3 explores the DSSW model of investor sentiment developed by four

There is a fierce debate on whether stock market is efficient all these years. Some people advocated Fama’s research in 1960s, and they believe that the Efficient Markets Hypothesis has been well established. However, others do not agree with. They found some evidence to prove market inefficient by empirical researches. This essay mainly focuses on the Efficient Markets Hypothesis, and there are six parts to discuss. Firstly, it will compare the random walk theory and the weak-form of the Efficient Markets Hypothesis; Secondly, it will choose two empirical studies against the weak-form of the Efficient Markets Hypothesis; Thirdly, it will assess the semi-strong form with the weak-form the Efficient Markets Hypothesis; Fourthly, it will evaluate the semi-strong form of the Efficient Markets Hypothesis by two of empirical studies; Fifthly, it will identify the contrast between the strong form of the Efficient Markets Hypothesis with both weak form and semi-strong form; Last but not least, it will use one empirical study to judge the strong form.

EMH is a commonly used and is known as the foundation of financial theory. Those in support of this also tend to focus on the random-walk hypothesis. If the market is efficient then

The EMH supposes that the capital market should be a level game for all players. Herein, all information consequential to an investor’s decision is incorporated in determination and fixation of share prices. This is irrespective of whether it has been made public or not, as long as any single investor is aware of its existence. As such there is no chance of overpricing or underprizing of shares (Gili, Cheng-few & Basin 2008). With any new information, the change is instantly effected. Prediction, according to the premise, is a mere episode of chance. Today, some of the world’s business moguls have seemingly done the impossible by overtaking the market alteration. This has made them reap great benefits from capital market trading and obviously evoked doubts on the authenticity of this proposition.

Academics noticed flaws with the efficient market theory paying attention to the volatile stock price abnormality. Despite these anomalies appearing minor in nature, it