Essay on The Efficient Market Hypothesis

1.8.2. Behavioral Finance Macro (BFMA) – It detects and describes the deviation in efficient market hypothesis that was explained by behavioral

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.

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).

When establishing financial prices, the market is usually deemed to be well-versed and clever. In a stock market, stocks are based on the information given and should be priced at the accurate level. In the past, this was supposed to be guaranteed by the accessibility of sufficient information from investors. However, as new information is given the prices would shift. “Free markets, so the hypothesis goes, could only be inefficient if investors ignored price sensitive data. Whoever used this data could make large profits and the market would readjust becoming efficient once again” (McMinn, 2007, ¶ 1). This paper will identify the different forms of EMH, sources supporting and refuting the EMH and finally

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.

Many researchers have tested the validity of the semi-strong form of the Efficient Market Hypothesis through testing major announcement event such as dividend announcements and bonus issue announcements. (Khan and Ikram, 2010), This is because the announcements may offer desirable factors to the market which will influence stock prices. Observing the performance of mutual funds and brokerage companies is the second aspect for evaluating the semi-strong form of market efficiency (Khan and Ikram,2010). This is because brokers and fund managers are believed to have access to non public information that gives them an advantage when trading on the stock market.

Samuelson has offered the dictum that the stock market is ‘‘micro efficient’’ but ‘‘macro inefficient.’’ That is, the efficient markets hypothesis works much better for individual stocks than it does for the aggregate stock market. In this article, we review a strand of evidence in recent literature that supports Samuelson’s dictum and present one simple test, based on a regression and a simple scatter

The Efficient Market Hypothesis expresses that assets prices should reflect all the information available in the financial markets. However, information is changing rapidly and therefore, prices should adapt quickly. This document states and discusses the main ideas behind the Efficient Market Hypothesis providing information about its three versions Weak Form Efficiency, Semi-Strong Form Efficiency and Strong Form Efficiency.

First, when it comes to the importance of efficiency, no one can describe better than the professor Gillian Hadfield, who said that efficiency is the “bedrock of gold ” of the capital market,

Although the notion of market efficiency has- albeit rudimentarily- been dealt with since the 16th century , it was only when Eugene Fama published his PhD and his subsequent article Efficient Capital Markets: A Review of Theory and Empirical Work in 1970 that the Efficient Market Hypothesis (hereafter EMH) was established. The fundamental argument offered by EMH proposes that the multiplicity and interaction of fully rational economic actors within a market will lead to the elimination of disparities between market prices and actual values and allow the former to randomly fluctuate around the

Stock market efficiency has been the subject matter of research studies for periods well over the past three decades. Several theories have been established about basically how the competition will drive all information into the prices of securities quickly. Centering this idea the concept known as Efficient Market Hypothesis has been evolved which also has been the subject of intense debate among academics and financial professionals. Efficient Market Hypothesis states that at any given time security prices fully reflect all available information. It is stated that if the markets are efficient and current prices fully reflect all information then buying

Therefore, as presented by West (1988), it is necessary to identify a behavioral model which can highlight the importance and the impact of psychological and irrational behaviors that can explain the latest financial crisis and asset bubbles. The greatest support of what can be defined as Behavioral Finance comes from Shiller (1984), who believes that financial behaviors are influenced by social movements. To explain return patterns that are anomalous from the classical viewpoint of EMH, it is necessary to introduce either market imperfections or failures of human rationality (Hirshleifer et.al, 2003). Herding is one of many psychological factors and biases that influences markets’ stability and can be identified as the cause of many stock markets bubbles and crashes. Moreover herding leads to unhedgeable systemic risk and causes markets’ failure to reflect all relevant information.

The occurrence of stock market bubbles and crashes is often cited as evidence against the efficient market hypothesis. It is argued that new information is rarely, if ever, capable of explaining the sudden and dramatic share price movements observed during bubbles and crashes. Samuelson (1998) distinguished between micro efficiency and macro efficiency. Samuelson took the view that major stock markets are micro efficient in the sense that stocks are (nearly) correctly priced relative to each other, whereas the stock markets are macro inefficient. Macro inefficiency means that prices, at the aggregate level, can deviate from fair values over time. Jung and Shiller (2002) concurred with Samuelson’s view and suggested that waves of over- and

Market efficiency refers to the degree to which stock prices reflect information that affects price changes. The basic function of the securities market is the effective allocation of capital resources to promote the healthy and rapid economic development. The higher the effectiveness of the market, the more rational allocation of funds. Stock prices reflect information faster and more comprehensive, the securities market will be more efficiency. According to the reflection of stock prices to different information, it is possible to divided the efficiency of securities market into three levels, namely, weak-form efficiency, semi-strong-form efficiency and strong-form efficiency. The well-run stock market generally

flexibility for investor to choose investment based on their preference. For both company and investor who are involved in the capital market, understanding about capital market condition becomes matter in order to understand how the market is actually works. One aspect of capital market conditions that might become consideration before deciding to invest is the market efficiency. The term of market efficiency, which is found in the capital market literature, is used to elaborate the relationship between the information and the share price. In 1970, Fama proposed the Efficient Market Theory and defined capital market efficiency as the market in which prices fully reflect all available information. Depending on the