Theories concerning finance have developed throughout the years evolving from the efficient market

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.

On the other hand behavioural finance defines the market dynamics and movement in terms of psychology of the participants in the trading process. Behavioural finance proposes that the amount of information available in the market regarding the factors that determine the output or profitability of a particular investment actually serve to determine the movement and output of the market itself (Fama, E.F., 1998).

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

Even though we made profits in the last week of our trading game, we were still unable to compensate for our total losses incurred. Previously, we had the mind-set that the stock market was far simpler; people buy shares in the hopes of making money. Some people buy and sell often for speculation purposes, while others are long term investors. Sometimes people make a lot of money very quickly, and sometimes people lose a great deal just as fast.

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

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.

The efficient market hypothesis theory states that it is impossible to “beat the market” because of the stock market efficiency causes the existing share prices to reflect all relevant information. Critically evaluate the above statement with reference to the three forms efficient market hypothesis.

The hypothesis is that good news announcements are associated with positive returns and bad news is associated with negative returns. Announcements of bad news have generally been established to have lower earnings response coefficients.

In the past 12 months, the world’s stock market has experienced a particularly high degree of volatility that has never been seen in recent years. “On Monday 24 August 2015, about £74billion was wiped off the value of Wall Street and FTSE 100, and the Down Jones Industrial Average lost more than 1000 points at one stage on that day” (Allen, 2015).

This financial theory was best defined in the 1970s by Eugene Fama in his article ‘Efficient Capital Markets: A Review of Theory and Empirical Work’. In this article Eugene declared that no one could “beat the markets” as a result of all current stock prices being unpredictable since they quickly reflect all information about the stock as it becomes available and the potential prices of stock are also unpredictable as it is dependent on all future information, which is not currently available. Therefore, investors are unable to use technical or fundamental analysis to achieve above-average returns.

There were other theories that were proposed by other scholars refuting and other supporting the hypothesis (Sewell 2012). Real Market Example The concept of the efficient market hypothesis has been investigated in various markets. An example is the London stock exchange. A study was carried out in the London Stock Exchange to determine whether the market is efficient or not. In spite of the fact that the concept has been discussed for over three decades, to date, there is still no agreement amongst the economist about its authenticity of the EMH theory. The analysis was done on the daily, weekly, monthly and annual Dow Jones data and took to evaluate whether the market can be defined as efficient or predictable. The results largely complied with the efficient market hypothesis by large. However, long-term data analyses were conducted, and there was no evidence of memory in the data that is consistency with EMH. The results concluded that the long-term analysis does not produce any long term good results as the opponents of EMH suggest. Nonlinear forecasting can yield some returns and thus the market was found to be a semi-strong form of efficiency. The idea is also supported by the common observation of particular company stocks responding to information released such as the expected income, planned mergers and acquisition and any other change that

Five market anomalies that appeared in U.S. and Australian equity market are discussed. They are Book-to-market ratio, January effect, small firm effect, weekend and temperature effect. The small firm effect

Efficient Market Hypothesis was firstly brought forward by E. Fama in 1960s. Its main believing is in that security prices fully reflect all available information in an efficient market, which allows investors to earn no above average risk-adjusted return (Fama, 1965). Although some technical studies and opportunistic investors have stretched hard in searching for proofs to challenge the efficient market hypothesis, and to prove above average returns could be gained by predicting the future price using the existing information, their efforts result only in finding of the ¡®anomalies¡¯ in the market which are destined to self-destructing in the long run or being proved worthless taken the transaction cost.

Many finance specialist use conventional finance to assist them with determining and analyzing stock performance. According to Albert Phung’s article on Investopedia titled “Behavioral Finance Background” many models have been created from conventional finance such as the Capital Asset Pricing Model and the Efficient Market Hypothesis. This section describes why behavioral finance should have a more active role in finance. This article states “academics in both finance and economics started to find anomalies and behaviors that couldn 't be explained by theories available at the time. While these theories could explain certain ‘idealized’ events, the real world proved to be a very messy place in which market participants often behaved very unpredictably” (Phung, 2014). Conventional and behavioral finance is compared to one another throughout this article. Phung states that behavioral finance is designed to explain our actions, while conventional finance is designed to explain the actions of the “wealth maximizers”, otherwise known as the

The efficient market hypothesis (EMH) promoted by Fama (1970) is considered an important theory in financial area. However, the existence of momentum profits has threatened EMH.