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Efficient Markets Hypothesis(Financial Economics) - Essay Example

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In the long run, therefore investment cannot be developed which rely on the past historical prices to gain abnormal returns. In this scenario, technical…
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Efficient Markets Hypothesis(Financial Economics)
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Download file to see previous pages The random movement argument of weak form of efficiency may not be valid argument as research studies have clearly outlined a positive correlation between degree of tending observed in prices as well as the time period. This therefore clearly outlines that the prices do not follow a random path but rather show certain trends. It is however, critical to note that these period are not relatively long but trends do emerge over certain period of time.
Behavioral economists argue that markets are imperfect because of the behavioral and cognitive biases. Imperfections in the market emerge as a result of these cognitive behaviors and as such markets may not efficiently operate. These cognitive biases emerge as a result of overconfidence, information and representation bias and other human errors result into errors in judgments. These biases and human error does not allow investors to value the stocks properly and as such, markets show inefficiency. These errors often result into investors buying the growth stocks and ignoring value stocks and those who can reason correctly can profit out of this situation and hence can beat the market easily.
Studies conducted on the Indian Stock Exchange outlines the weak form of inefficiency and suggested that the prices actually do not follow random prices. Various local studies in the developing countries have consistently shown the same results that the markets are weak form inefficient at least in the local developing markets. These studies have clearly shown that the markets may not be efficient in any form of efficiency. These arguments have also been supported by other empirical studies indicating that even the strong form of efficiency does not exist.
Stocks having low P/E ratios tend to provide higher returns and thus can allow investors to earn abnormal returns if chosen wisely. Investors developing their studies based upon choosing the stocks on P/E ratio can beat the market. It ...Download file to see next pagesRead More
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