Nobody downloaded yet


Comments (0) Cite this document
Title: Efficient Market Hypothesis Date: ‘The Efficient Market Hypothesis (EMH) continues to provide a convincing explanation of how asset prices should respond to different types of information, but it does not provide a very a good account of the pricing of a firm’s debt and equity…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER91.4% of users find it useful
Read TextPreview


Download file to see previous pages This proposition states that the markets price of securities such as shares traded in any stock exchange will vary or fluctuate according to the nature of information available to the members of the public. For instance information on company profitability, mergers, acquisition and business combination, dividend declaration and investment project that a firm intends to undertake are some of the information that influence the market price of securities. In addition to definition delineated above, efficient market hypothesis can also be delineated into three different ways, that is, allocative efficiency, operational and information efficiency. Allocative efficiency A market is considered to allocative efficient if it channels its direct savings towards the most efficient prolific project. In this case, if an enterprise is efficient it will find it easier to raise funds and this results to foster of the economy arising from the efficiency (Ogilvie, 2006). Allocative efficiency is perceived to be at its optimal if savings cannot be a channelled to an enterprise or project that would result to higher economic prosperity. . In order, to achieve allocative efficiency in the financial market , the market should contain a fewer number of financial intermediaries such that funds are allocated directly from savers to users. Operational Efficiency Operational efficiency can be simply delineated in general as the minimization of transaction cost. This efficiency concept relates to the cost of conducting business, or the cost of capital that is the interest cost charged by the lender on money borrowed to the borrower. If the transaction cost is high this usually translates to high cost of using the financial markets. (Elton 2010). Therefore, transaction should always be at its minimum in order to increase operational efficiency especially where there is fair completion between the various market players. In order to increase operational efficiency then there is need to increase the number of market players who can be able to participate in the market continuously (Elton 2010). . Information Efficiency Information efficiency relates to extent that the information available to the members of public regarding the future panorama of a security is reflected in the present price of the said security. If all parties have the same information which is reflected in the present price of the security at their disposal then conducting investigation on securities becomes fair to all parties. This levels the playing ground for all market participants, because all the parties have access to same information which also reflected by the security price. Information efficiency is of great significant to financial managers since it indicates the effect of management decision will quickly and accurately be reflected in security prices (Elton 2010). The concept of Efficient market hypothesis is main based on information processing efficiency. It articulates that stock markets are proficient if and only if is reflected in security prices accurately and rapidly(Elton 2010). Efficient Market Hypothesis Levels Efficiency Efficient Market Hypothesis efficiency can be divided into 3 different levels: Weak form level of efficiency Weak for level of efficiency indicate that the historical price of securities can be used to articulate the changes in the security prices. According to this level of efficien ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“EFFICIENT MARKET HYPOTHESIS Essay Example | Topics and Well Written Essays - 1000 words”, n.d.)
EFFICIENT MARKET HYPOTHESIS Essay Example | Topics and Well Written Essays - 1000 words. Retrieved from
(EFFICIENT MARKET HYPOTHESIS Essay Example | Topics and Well Written Essays - 1000 Words)
EFFICIENT MARKET HYPOTHESIS Essay Example | Topics and Well Written Essays - 1000 Words.
“EFFICIENT MARKET HYPOTHESIS Essay Example | Topics and Well Written Essays - 1000 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document


Efficient Market Hypothesis

...Efficient Market Hypothesis Abstract This study deals with one of the most important areas of behavioural finance, the efficient market hypothesis. Objective of this study is to critically examine different forms of efficient market efficiency, especially the weak or semi-weak form. There are empirical theories and models developed on this critical financial issue. Important theories like random walk hypothesis, fair game model have been discussed in this paper. Different forms of efficient hypothesis, i.e. weak, semi-strong and strong, will be critically analyzed to identify why different forms of market efficiency lead to major issue in fundamental analysis of companies. Implications of weak or semi strong market efficiency... will be...
10 Pages(2500 words)Essay

Efficient Market Hypothesis

...Implications of Efficient Market Hypothesis Introduction In an efficient capital market, the current stock or share prices fully represent the information relating to stocks and shares, including the information about the risk as well. in the year of 1970, Eugene Fama provided survey material, ”Efficient Capital Markets,” in which it was believed and promoted that the securities markets were extremely efficient enough to reflect the full information about the stock market and the about the individual stocks as well. Lo and MacKinley (1988) found positive...
7 Pages(1750 words)Essay

Efficient Market Hypothesis

...?Efficient market Hypothesis Efficient market hypothesis presumes that market can function exceptionally well in allocating resources. It is a situation where no investor in the money markets can achieve excess profits based on risk-adjustment, if information on the investment is in public domain at the time when making the investment. Efficient market hypothesis stipulates that the prices of stocks in the money markets represent summation of all probabilities of all future consequences. The information available in the public domain is...
6 Pages(1500 words)Essay

Applied English and Communications

4 Pages(1000 words)Essay

Efficient Market Hypothesis

...?Efficient Market Hypothesis Inserts His/ Her here Efficient Market Hypothesis The EMH (Efficient-market hypothesis) in finance affirms that financial markets are performing efficiently on the basis of certain information. Consequently, one cannot systematically accomplish returns on risk-adjusted basis, in surplus of mean market returns, or on the basis of information accessible at the time of investment. The development of EMH goes back to the 1960s as Paul A. Samuelson and Eugene F. Fama developed their versions of EMH. Surprisingly,...
4 Pages(1000 words)Assignment

Efficient Market Hypothesis

...Efficient Market Hypothesis An investment theory 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. According to the Efficient Market Hypothesis (EMH), this means that stocks always trade at their fair value on stock exchanges, and thus it is impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. Thus, the root of the EMH is that it should be impossible to outperform the overall market through expert stock...
9 Pages(2250 words)Essay

The Efficient Market Hypothesis

...% 20% 12% 20% 16% Mean return 18.5% THE EFFICIENT MARKETS DEBATE "I'd be a bum in the street with a tin cup if the markets were efficient" (Warren Buffet) The Efficient Market Hypothesis There has been significant interest on the part of scholars and academicians as to the causes behind movement of stock prices and their predictability. The Efficient Market Hypothesis suggests that stock prices tend to move because of available information. Basu illuminates that "in an Efficient Capital Market security prices fully reflect...
6 Pages(1500 words)Essay

The Efficient Market Hypothesis

...Efficient market hypothesis is a theory that was established by Eugene Fama at the Of Chicago, Booth School of Business. It was established in the 1960s. The theory deals with issues that relate to getting answers on queries that rose about the reasons why there are price changes in the security markets and how these changes took place within a financial period of a company. It states that the financial markets are usually efficient in terms of providing the right information to the investors. It also stipulates that the price of traded assets consists of information that is available for use. The example of traded assets involves;...
14 Pages(3500 words)Essay

Efficient Market Hypothesis

...Trying to make superior trading returns using technical analysis or fundamental analysis of shares is self-defeating Introduction Efficient Market Hypothesis (EMH) holds that stocks or shares trade at their fair value thus preventing buyers and sellers from gaining unduly from market inefficiency. In other words since the market functions efficiently investors cannot buy undervalued shares or sell overvalued shares. Thus if any investor desires to earn higher returns he has to buy much riskier shares or bonds. Ordinary shares carry then least amount of risk and therefore the least amount of return. However investors are using technical...
8 Pages(2000 words)Case Study

Efficient market hypothesis

... Efficient Market Hypothesis The efficient market hypothesis asserts that the prices of securities in the market reflect the past, present and future information. All investors in the market therefore have all the information pertaining the securities and that no single investor is in a position to make above average returns without incurring above average risks. Investors will therefore make normal profits. According to this hypothesis, any new information that can influence the prices of securities will spread randomly to all investors. The weak form hypothesis argue that the prices of securities only reflect past information and therefore investors can make above average return in such market. For the case of semi-strong form... , the...
2 Pages(500 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic EFFICIENT MARKET HYPOTHESIS for FREE!

Contact Us