The Efficient Market Hypothesis

768 Words4 Pages
The efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection…show more content…
Fama stressed that market efficiency can be only tested jointly with some of the equilibrium models. The efficient-market hypothesis requires all investors to have a rational expectation on the market, the relational expectation is that average of information is correct and that updating the information is necessary. Efficient-market hypothesis explains that when a investor is shown new information he may overreact and some investors might not react at all, and this notion is accepted. Efficient-market hypothesis only requires one basic thing, which are that when facing new information investors should follow a distribution pattern. There are three common forms in which the efficient-market hypothesis is commonly stated weak- form efficiency, semi-strong-form efficiency and strong-form efficiency. Each form is different, and explains how markets work in the efficient market hypothesis. The weak form efficient market hypothesis implies that the market is efficient, when we use the market information given. The hypothesis also assumes that the future prices cannot be predicted by analyzing prices form the past. The rates of return on the market should be independent, and past rate of returns have no effect on the future rates to be determine. Also excess returns cannot be earned in the long run by using investment strategies based on

More about The Efficient Market Hypothesis

Get Access