Study of Efficient Market Hypothesis 04012 - Essay Example

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It has been suggested by the critics that “Efficient Market Hypothesis” (Abreu and Brunnermeier, 2003) was accountable for the financial crisis. EMH declares that…
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Download file to see previous pages ns that the bubbles in prices of assets are not possible nor does EMH deny that behavioural and environmental features cannot have deep influences on the required risk premiums and rates of returns (Timmermann and Granger, 2004).
EMH declares that shares are constantly traded at their reasonable value, therefore making it impracticable for the investors to purchase the undervalued shares or sell shares for overstated or inflated prices (Borges, 2010). According to this, it may be impossible for the investors to outperform the entire market through market timing or expert share selection. So, the only means for the investor to receive higher or advanced returns is through buying riskier investments. There are three forms of efficiency i.e. weak-form, strong and semi-strong form of efficiency (Morningstar, 2015). In the efficiency of weak-form, it is not possible to predict the future price by analysing the past prices and the surplus returns cannot be received by employing the investment strategies which is based on the historical data (Gupta and Basu, 2011; Moustafa, 2004). In the semi-strong efficiency, stock prices are adjusted to the publicly accessible new information (Ma, 2004). However, the technical or fundamental analyses are not able to consistently produce surplus returns. In the efficiency of strong-form, share prices reveal all information, private and public and no individual or company can earn surplus returns (Chau and Vayanos, 2008).
The most influential argument against EMH is that the securities markets have frequently experienced excessive bubbles. When the market bubble exploded, internet associated stocks lost almost 90% of their value. The related mispricing of securities which are mortgage-backed had excessive consequences for the financial institutions as well as for the economy of entire world. Critics have deemed these incidents to be evident cases of the market inefficiency. The continuation of bubbles in the prices of assets is ...Download file to see next pagesRead More
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