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Topic 2 : In light of the existing evidence, critically analyse the validity of the strong form of the Efficient Market Hypothesis - Essay Example

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The weak EMH consists of bonds, stocks or property. It reflects all the past information that is available publicly and it claims prices on traded assets. The…
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Topic 2 : In light of the existing evidence, critically analyse the validity of the strong form of the Efficient Market Hypothesis
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Extract of sample "Topic 2 : In light of the existing evidence, critically analyse the validity of the strong form of the Efficient Market Hypothesis"

Download file to see previous pages There was a very close relation between the EMH and the random walk hypothesis and then comes the Martingale model. The stock market price was first introduced by Jules Regnault, who was a French broker, and then followed by Louis Bachelier who was a French mathematician. Few studies indicated that US stock prices follow the random walk model. The only thing is required by the EHM is the investors reactions which is followed by a normal distribution pattern, just because the market prices should be exploited for making any abnormal profit. Thus no one can be sure about the market trend that it will be always right. The efficient market hypothesis is followed in both the ways by empirically and theoretically by investors and researchers. The imperfections in financial markets are the combination of cognitive biases and that includes overconfidence, overreaction, and other predictable human errors. In the efficient markets it has identified that the one who has a less return throughout the year is the loser and who has been getting a high return is the winner.
The previous two forms of efficient market hypothesis are not only represent the market prices correctly from the past and present information but also predict the future information accurately and the random walk occurs because of some wrong predictions provided by the market about the future. Strong form is assumed that the cost of credit is in a straight line and uniform for all the investors, the transaction cost and the asymmetry information does not exist. These are not true in reality but the modern market takes it as approximation for most of the assumption part. In the substantial empirical evidence it is generally proving that in most cases of the long run many company or group can state that the prices are always fair over the long term. In the strong form of EMH, there is no point of studying the past information (Bodie, Kane and Marcus, 2008, pp.102-105).
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