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Definition of Efficient Market Hypothesis - Literature review Example

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This literature review discusses several theories and models developed to further increase the understanding of financial markets. The review discusses one of the fundamental aspects of analyzing capital markets such as the efficient market hypothesis…
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Definition of Efficient Market Hypothesis
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Download file to see previous pages In the realm of financial markets, the value of information is indispensable. It is through the data that most analysts gain more information regarding the market. Market behavior is generally characterized by the flow of information. Therefore, comprehending the data that comes in and out of the market is vital. Through this information, analysts are able to predict prices and movements in the market. In addition, the data that is observed in the market generate perspectives that allow practitioners to forecast long-term movements in the components of financial markets.
Although financial markets are hard to grasp, there are suggestions that such markets function with efficiency. Efficiency, when referred to the market, pertains to the changes in price and exchange between buyers and sellers. Apparently, financial markets are highly valued because investors are more inclined with fast-paced forms of revenue generation. Most important, the efficiency of the market makes decision making less risky and more rewarding.
Eugene Fama (1970) was the main innovator of the Efficient Market Hypothesis (EMH). EMH implies that financial markets are efficient such that the price of assets, stocks, and other securities reflect all information available; thus, provide an unbiased view of investors regarding future prospects. One important aspect that EMH asserts is that it is seemingly impossible to outperform the market through the use of information known to the market. The information as defined by EMH refers to the data that are unpredictable in the present and appears sparingly in the future.
EMH is considered as a fundamental component of modern financial economics (Feinstein, 2000). A compelling view of EHM was provided by Bodie et al. (1996) describing it as a result of rigorous underpinning and supported extensive empirical work. Bowman and Buchanan (1995) identified EMH as meticulously formulated. It is clear that the process in supportive concepts for a developed and competitive securities market. Several executives, however, pointed out some inconsistencies with EMH. These arguments are indeed supported by studies involving various subjects.
The essence of EMH has embedded on the information associated stocks and the prevailing price associated with these securities. Malkiel (1987) stated that the varying point of views being presented by the buyers and sellers represent all the information and from the pool, relevant data are gathered. Indeed, the price of stocks will be affected by unexpected news, which of course is still unknown to the investors.
There is a natural relationship between markets that efficiently provide available information to their role in efficient market distribution (Stiglitz, 1981). Further studies, on the other hand, pointed out that markets that provide efficient information are not required to provide productive efficiency in the economy. Such description supports tendencies when the market is incomplete and information that is considered as differentiated is costly but valuable. It is understandable that some data appear to be useless. But investors have been creative in creating a sense in this information. ...Download file to see next pagesRead More
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