The Efficient Market Hypothesis ( Emh )

Strong form efficiency is the final form of efficiency. Ross et al. (1993) emphasise all types of information, either public or private, are more likely to be incorporated in the stock market prices when the market is efficiently strong. Additionally, in this kind of market, it is impossible to determine any incomparable investors who are able continually to vanquish the market (Brealey et al., 2011). Expressed differently, strong competition is highly considered among the investors of the strong market efficiency. Therefore, the crucial investors may not be able to keep their high position in the long-term.

In A Semi-Strong market for example a capital market , ‘it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information.’ (The Efficient Market Hypothesis, 2015)

The quote shows a strong relation to the efficient market hypothesis (EMH), as it implies that the costs of capital are dependent from the amount of information given by the company.

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,

EFFICIENT MARKET HYPOTHESISName: Mamunur Rahman Introduction Efficient Market Hypothesis (EMH) is a concept that was developed in 1960 's Ph.D. dissertation that was presented by Eugene Fama. The efficient market hypothesis states that, in a liquid market, the price of the securities reflects all the available information. The EMH exists in various degrees that include weak, semi-strong and strong, denoting the inclusion of non-public information in the market price. The theory contends that notion that it is possible to outperform the market. This is so because the market value contains all the available information and thus such attempts are chances and not skills. The weak EMH indicates that the market prices fully reflect all the

“An 'efficient' market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to

A financial market is said to be efficient if asset respond to relevant information instantaneously (or promptly) and accurately so that no one is able to use information that is already known by the market to earn abnormal returns net of transaction costs and should not deviate from its fundamental true & fair price for a long period of time.

According the definition of EMH, the price which shown on the stock market already were the best results that shows the company’s operating ability. Therefore, it does not matter how much effort made by the stock firm and investor, and how cautious they are. Information already reacted in the stock prices, whether it is an expensive stock or a cheaper one. It seems that how much information could be reflected in price might the distinction of different form of market efficiency. Roberts (1967) had clearly defined the difference between the weak form, semi-strong form, and strong, and it further summarised by Fama (1970) to define the information efficiency, which is: “A market in which prices always ‘fully reflect’ available information is called ‘efficient’”. In the fact that several form market efficiency act in EMH indicates that does those forms real acts in the capital market should be analysed and proved.

1> Weak Form of efficiency: if current stock prices reflect all the information that from market transaction data, this capital market will be regard as weak efficiency.

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.

Efficient market is one in which stock prices fully reflect the information of a company, either positive or negative. If the information from a company is positive, investor will give a good response and the price of shares of this company will increase. Since the information is reflected in price at once, normal rate of return should only be obtained. Also the price that the firm received from issuing securities is the present value, and valuable financing opportunities are unavailable. There are three conditions that will cause market efficiency, which are the rationality of investors, dependent deviations from rationality and

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

The Efficient Markets theory has been a source of much controversy within both the academic and financial worlds. Eugene Fama first defined an “efficient” market as “a market where, given the available information, actual prices…represent very good estimates of intrinsic values” (1965, p.90). After Harry Roberts (1967) formed the “Efficient Market Hypothesis(EMH)”, Fama then went on to publish results that concluded the stock markets are efficient. Thus it is impossible to achieve consistent abnormal returns. However, investors daily are seeking to defy the EMH and therefore the hypothesis is under constant audit 252 days a year.

There is a saying that no one can beat the market systematically when market is efficient because no one can predict the return. Market is said to be efficient when all available information fully and quickly reflected in the security price. Efficiency can be achieved when market is perfectly competitive where there is no transaction cost (or lower than expected profit), no transactional delay and all traders behave rationally.

The Efficient Market Hypothesis was established by many researchers in the past over the time span of more than thirty years [Raaschou & Segell (1998), Fama & French (1996), McQueen, et. al, (1996), Ikenberry, et. al,(1995), Malkiel (1995), Brown & Goetzmann (1995), Goetzmann & Ibbotson (1994), Jegadeesh & Titman (1993), Elton, et. al,(1993), Chopra, et. al,(1992), Seppi (1992), Lee, et. al,(1991), Bernard & Thomas (1990), Harris (1989), Ippolito (1989), Shevlin et. al,(1984), Charest (1978), Moore (1964)].