Efficient Market Hypothesis - 9025 Words

Introduction The efficient markets hypothesis (EMH) is a dominant financial markets theory developed by Michael Jensen, a graduate of the University of Chicago and one of the creators of the efficient markets hypothesis, stated that, â€Å"there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Markets Hypothesis† [Jensen, 1978, 96]. This paper analyzes whether it is possible to measure if markets are efficient in the strong form of EMH. A generation ago, the efficient market hypothesis was widely accepted by academic financial economists; for example, Eugene Fama’s (1970) influential survey article, â€Å"Efficient Capital Markets.† It was generally believed that securities markets were†¦show more content†¦This implies that it is impossible to beat the market. Many studies shed light on whether investment advisers and mutual funds (some of which charge steep sales commissions to people who purchase them) b eat the market. One common test that has been performed is to take buy and sell recommendations from a group of advisers or mutual funds and compare the performance of the resulting selection of stocks with the market as a whole. Sometimes the advisers’ choices have even been compared to a group of stocks chosen by throwing darts at a copy of the financial page of the newspaper tacked to a dartboard. The Wall Street Journal, for example, used to have a regular feature called â€Å"Investment Dartboard† that compared how well stocks picked by investment advisers did relative to stocks picked by throwing darts. Did the advisers win? To their embarrassment, the dartboard beat them as often as they beat the dartboard. Furthermore, even when the comparison included only advisers who had been successful in the past in predicting the stock market, the advisers still didn’t regularly beat the dartboard. Consistent with the efficient market hypothesis, mutual funds also do not beat the market. Not only do mutual funds not outperform the market on average, but when they are separated into groups according to whether they had the highest or lowest profits in a chosen period, theShow MoreRelatedThe Efficient Market Hypothesis768 Words   |  4 PagesThe efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always tradeRead MoreEfficient Market Hypothesis1641 Words   |  7 PagesEfficient Market Hypothesis When establishing financial prices, the market is usually deemed to be well-versed and clever. In a stock market, stocks are based on the information given and should be priced at the accurate level. In the past, this was supposed to be guaranteed by the accessibility of sufficient information from investors. However, as new information is given the prices would shift. â€Å"Free markets, so the hypothesis goes, could only be inefficient if investors ignored price sensitiveRead MoreThe Efficient Market Hypothesis1236 Words   |  5 Pageswhether stock market is efficient all these years. Some people advocated Fama’s research in 1960s, and they believe that the Efficient Markets Hypothesis has been well established. However, others do not agree with. They found some evidence to prove market inefficient by empirical researches. This essay mainly focuses on the Efficient Markets Hypothesis, and there are six parts to discuss. Firstly, it will compare the random walk theory and the weak-form of the Efficient Markets Hypothesis; SecondlyRead MoreEfficient Market Hypothesis3125 Words   |  13 Pages`A market is efficient with respect to a particular set of information if it is impossible to make abnormal profits by using this set of information to formulate buying and selling decisions.’ Critical Analysis When we invest money into the stock market we do it with the intention of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform, or ‘beat the market’. However, market efficiency -  championed in the efficient marketRead MoreEfficient Market Hypothesis an2916 Words   |  12 PagesThe quote shows a strong relation to the efficient market hypothesis (EMH), as it implies that the costs of capital are dependent from the amount of information given by the company. According to my opinion, agency theory is a good explanation for costs of capital. Agency theory defines contracts as under which one party #8211; called principal #8211; engages another party #8211; called the agent #8211; to perform service on the principal#8217;s behalf. Concluding, the principal delegatesRead MoreThe Origin Of The Efficient Markets Hypothesis Essay933 Words   |  4 Pagesthe Efficient Markets Hypothesis (EMH) can be traced back to the groundbreaking progress of French mathematician Louis Bachelier (1900), who proposed the concept of random walk as the fundamental model for financial asset prices. However at that moment the idea was not widely accepted by other academics. Then Samuelson (1965) initiated the modern literature by proving that asset prices in efficient markets fluctuate randomly, and only in response to new information. In 1960s, Efficient Markets HypothesisRead MoreA Theory Of The Efficient Market Hypothesis1635 Words   |  7 PagesThe main idea of market efficiency reflects that all the information which is associated with stock market is basically showing on the stock process in any time. It appears that the stock prices are unpredictable because the random changing of the new information affects it. Under the circumstance of that the French mathematician Bachelier (1900) first came up with the idea about that random information results to the unpredictable prices in marketing concept. After that Osborne (1964) brought aRead MoreEvaluating The Efficient Market Hypothesis1817 Words   |  8 Pages 1. Abstract The Efficient Market Hypothesis expresses that assets prices should reflect all the information available in the financial markets. However, information is changing rapidly and therefore, prices should adapt quickly. This document states and discusses the main ideas behind the Efficient Market Hypothesis providing information about its three versions Weak Form Efficiency, Semi-Strong Form Efficiency and Strong Form Efficiency. The Efficient Market Hypothesis, might be a debatableRead MoreEssay on The Efficient Market Hypothesis1845 Words   |  8 Pages1. INTRODUCTION The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics duringRead MoreThe Efficient Market Hypothesis ( Emh )991 Words   |  4 PagesThe Efficient Markets Hypothesis (EMH) The classic statements of the Efficient Markets Hypothesis (or EMH for short) are to be found in Roberts (1967) and Fama (1970) â€Å"An ‘efficient’ market is defined as a market where there are large numbers of rational, profit ‘maximizes’ actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among