In the paper “Implications of Efficient Market Hypothesis” the author analyzes an efficient capital market, the current stock or share prices. Efficient market hypothesis is divided into three types-weak-form, semi-strong form and strong form efficient markets…
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On the other hand, the semi-strong form of efficient market hypothesis assumes that the stock prices fully reflect and represent the public information, mentioning and indicating that the fundamental analysis would not bring the yield of superior risk-adjusted returns. The strong-form of efficient market hypothesis is based on the assumption that the prices of securities reflect both private and public information, highlighting and indicating that the investors would be able to earn higher risk-adjusted returns. But, these three forms of efficient market hypothesis have proved some serious limitations. And these serious limitations proved their existence in the year of 1987 when the event of market crash occurred. Is it possible to rationally explain the causes of the market crash of 1987? Is it appropriate to say that markets were efficient enough to represent the prices of stocks in the required way? But, that was not end of it; rather they continued to be part of the finance history. In the year of 1990, the Internet Bubble totally invalidated the rationale behind the use and application of efficient market hypothesis. On the basis of hindsight, it is clearly evident that the equity valuation, which normally heavily depends on the unpredictable and uncertain future predications, was based on irrationality and irrational and unsupportable claims. After that part, its implications in terms of validity and applicability of this theory would be critically accounted for....
In the year of 1990, the Internet Bubble totally invalidated the rationale behind the use and application of efficient market hypothesis. On the basis of hindsight, it is clearly evident that the equity valuation, which normally heavily depends on the unpredictable and uncertain future predications, was based on irrationality and irrational and unsupportable claims. In the subsequent parts of this piece of work, first the concept and theory of efficient market hypothesis would be clearly explained and highlighted. After that part, its implications in terms of validity and applicability of this theory would be critically accounted for. Definition__________________________________________ An efficient capital market is defined as a capital market in which the current price of a share or stock fully and totally represents and reflects all the stock or share related information, including the information of risk (Schweser, 2004). Furthermore, an informationally efficient capital market is defined as a capital market in which a price of security or stock rapidly and fast adjusts as soon as a new piece of related information is arrived. This piece of definition of an efficient capital market hypothesis is based on certain assumptions, and they are: First, a considerable number of participants, who are there to increase profit or returns on stocks, tend to understand and analyse and and give value to stocks and securities, and these participants are independent of each other. Second, any piece of new information appears in a capital market in a random fashion; and pieces of information are also announced independent of each other with regard to timing as well. Third, securities and stocks investors and fund managers quickly and rapidly start estimating the prices of
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(“Efficient Market Hypothesis Essay Example | Topics and Well Written Essays - 1750 words”, n.d.)
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(Efficient Market Hypothesis Essay Example | Topics and Well Written Essays - 1750 Words)
“Efficient Market Hypothesis Essay Example | Topics and Well Written Essays - 1750 Words”, n.d. https://studentshare.org/management/1410385-efficient-market-hypothesis.
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 assumed to reflect stock prices in the money markets.
Related to these practices is the understanding that their occurrence is directly connected to the regulatory environment that allowed for their occurrence. The drastic deregulation that occurred during this period is in part linked to a theoretical belief in market efficiency, as policymakers have been accused of having too great a faith that the market would undergo self-correcting behavior.
The author explains that the banks granted loans assuming that markets were efficient while overlooking the underlying risk. The financial crisis of 2007-2012 highlighted the redundancy of efficient market theory as an explanation of the financial decisions. This statement has been evaluated with the help of the following course of events.
Basu illuminates that "in an Efficient Capital Market security prices fully reflect available information in a rapid and unbiased fashion" (1977, p663) This suggests that stock price, at a specific moment, reflects all the information that is available and the events that are announced.
The efficient markets hypothesis forms the basis for one of today’s major theories of the trading and valuation of financial instruments such as corporate stocks and bonds, as well as many other forms of equity or debt. It is vital for investors, traders, analysts,and others dealing with such instruments to understand how their values are determined.
The response was emanated from the different governments rather than from the market itself as many governments including US and UK governments injected money into the system to safeguard it from complete
According to the theory of Efficient Market Hypothesis, stocks are always traded on fair market value in the stock exchange market and so it makes it almost impossible to either sell their stocks for overstated prices or buy stocks at undervalued prices. As such, it
This paper presents a critical analysis on the validity of Efficient Market Hypothesis strong form based on existing evidence. Primary evidence shows that the initial confidence of the concept of Efficient Market Hypothesis is misplaced. Efficient Market Hypothesis based financial equilibrium models do not depict the actual trading operations.
The author of the paper states that the efficient market hypothesis proposes that assets in financial markets are priced after taking all the public information available into account. This means that people might not be able to earn abnormal profit consistently for a long period of time.