Finance; The 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.

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

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

The Efficient-Market Hypothesis (EMH) states that it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Further to the argument that agents were ignorant of and failed to engage with new information, the formation of asset price bubbles has been offered as a cause for the GFC. Ball argues that it is inherently difficult to recognise the presence of an asset price bubble until after the event has affected the market and even by recognising that prices did not accurately reflect true value, this could never have indicated a nearing price bubble burst to investors because EMH suggested that all then available information was

Efficient Market- Advertises in which security prices return all available information and adjust right away to any fresh information. If the safekeeping markets are truly well

Although, assuming that Efficient Market Hypothesis (EMH) holds, the responding stock market indices should reflect the harm caused by the earthquake, because, as EHM states that market prices fully reflect all publicly available information (Fama, 1970). Thus, it means that, if investors are rational and their decisions are not affected by noise traders, one can conclude that the decrease in stocks’ value is explainable by the damage of the catastrophe.

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

sider BACKGROUND Efficient market theory examines how accurately stock prices signal resource allocation alloc and fully reflect all available information. Fama (1970) introduced the efficient market hypothesis stating there are three forms of efficiency: weak, semi strong, and strong. A market semi-strong, that incorporates all historical information is said to be weak form efficient, while one that responds to all publicly available informatio is semi-strong efficient. In a semiinformation -strong efficient market, prices instantly change to reflect publicly available information. A strong form market, strong responds to all information, both public and private. The hypothesis claims that achieving above average returns on a risk adjusted basis is impossible (Fama 1970). (Fama, The lowest level of market efficiency, weak form, states that the market only reacts to historical information. This means that no one can earn above normal returns based on published historical information; however, the market does not quickly react to new public or private information. It may be possible then, in a weak form efficient market, to obtain abnormal returns form using either new publicly available or private insider information (Fama 1970). (Fama, A semi-strong form market is more efficient that a weak form, as it reacts to publicly strong available new information quickly and share prices adjust to reflect the market’s reaction. share Obtaining

The existence of calendar or time anomalies is a contradiction to the weak form of the Efficient Market Hypothesis (EMH). The weak form of the EMH states that the market is efficient in past price and volume information and stock movements cannot be predicted using this historic information. This form infers that stock returns are time invariant, that is, there is no identifiable short-term time based pattern. The existence of seasonality

Another concern relates of insider trading of market efficiency of stock market. In his classical study Fama (1970) proposes efficient market Hypothesis, which suggests that stock price reflects all available information (historical price, public and private) in

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

Efficient capital market “It was generally believed that securities markets were extremely efficient in reflecting information about the stock market as a whole” (Fama 1970). To extent that when there is new information about stock rise, the news was dispersed immediately and it affects the security 's price at that time.

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

Richard Roll, and University and Auburn, University of Washington, and University of Chicago educated economist, began his career researching the effect of major events of stock prices. This experience likely helped him reach the two conclusions he makes in his 1977 “A Critique Of The Asset Pricing Theory’s Tests”, one of the earliest and most influential arguments against CAPM. In the paper, Roll makes two major claims: that CAPM is actually a redundant equation that just further proves the concept of mean-variance efficiency, and that it is impossible to conclusively prove CAPM. His first claim relates to mean-variance efficiency: the idea that mathematically one must be able to create a portfolio that offers the most return for a given amount of risk. Roll claims that all CAPM is doing is testing a portfolio’s mean variance efficiency, and not actually modeling out projected future returns. The second claim in the paper is that there is not enough data about market returns for CAPM to ever prove conclusive. Even if modern technologies could help alleviate some of the burden of testing market returns for publicly traded equities, there is still no way to account for the returns of less liquid markets, where there is less public information. This means it is impossible for