Efficient market hypothesis - Essay Example

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All investors in the market therefore have all the information pertaining the securities and that no single investor is in a position to make…
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Efficient market hypothesis
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"Efficient market hypothesis"

Download file to see previous pages For the case of semi-strong form, the prices of securities depend on the present and past information and not on the future expected information. Finally, the strong form contend that the prices of securities in the market reflect all the information i.e. past, present and future and that this information is in the domain of all the investors (Schwert 21). There is no opportunity to make abnormal returns in a strong market.
The strong market supports the efficient market hypothesis, as it is this form where investors are never in a position to make abnormal profits without incurring higher risk. The other two forms: weak and semi-strong form fails to support the EMH because not all investors are privy to all the information about the market and therefore some investors are in a position to make above average rate of return without taking above average risks (Schwert 23). I however believe that there is no efficient market. This is because the assumption in which the EMH is hinged are ideal i.e. that there are no transaction costs, that all investors have all past, present and future information and that the stock markets are efficient. These assumptions are idyllic and unattainable. Markets can therefore be in either the weak or semi- strong form in which case some investors have more information than others can. This can be shown from the many cases in which those in management positions have used insider information.
Economists and psychologists in the behavioral finance sector however argue that in the short run, efficient markets are unattainable. This is because the prices of securities are influenced by other psychological factors like those that the expectation in future prices. They further assert that security prices cannot be disseminated equally because of the bandwagon effect. Investors will therefore consider other factors in the ...Download file to see next pagesRead More
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Hence, the EMH is of little relevance to corporate managers.’ Explain and discuss this contention. The efficient market hypothesis is a proposition which articulates that the market prices of security are a reflection of available information to the members of public.
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