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The Efficient Market Hypothesis - Literature review Example

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The paper "The Efficient Market Hypothesis" concerns EMH as a vital tool to be used to overcome some of the problems that investors face like the one experienced during the recent financial crisis and behavioral finance theory as an alternative theory and hypothesis that may be used to explain the behaviors of investors and financial markets.
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The Efficient Market Hypothesis
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Download file to see previous pages A passive investor may achieve a similar profit on average just as the active investor does. This paper will provide critical analysis of the efficient market hypothesis within the context of the financial meltdown of 2007-2011.  Sun, Stewart, and Pollard (2011 p.76) notes that the recent global financial meltdown was occasioned by perfect storm of economic conditions. The conditions include subprime mortgage crisis, liquidity crisis, property collapse, market violation, and an accommodating financial and regulatory environment. The meltdown is also arguably contributed by poor corporate governance. For example, there has been a lot of criticism of chronic and reckless risk-taking by the organization’s management that was catalyzed by bank’s payment policies. Efficient Markets Hypothesis (EMH)
The Efficient market hypothesis holds that the current market prices of financial assets is based on the rationality of all the available information about the prospective return on shares or assets. It suggests that future uncertainty is of ‘white noise’ type and speculators may be able to succeed in pushing the temporarily away from stability or equilibrium (Palit 2010, p.31). However, when the market clears continuously, EMH argues that rational traders bring back the system to equilibrium by taking a countervailing stance and imposing heavy losses on noise traders or speculators who bet against the fundamentals. Equilibrium asset or share prices will therefore be changed in those situations where there is turmoil to the fundamentals, whereas the supply turmoil are inevitable, the severity of demand turmoil can be tempered with using policies aimed at giving more informational access about market participants fundamentals, and avoids policy surprises. In some instances it is used to control share prices in the financial markets (Palit 2011, p.31).   ...Download file to see next pagesRead More
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