The Efficient Market Theory And Evidence

The Efficient Market Hypothesis (EMH) asserts that, at all times, the price of a security reflects all available information about its fundamental value. The implication of the EMH for investors is that, to the extent that speculative trading is costly, speculation must be a loser's game. Hence, under the EMH, a passive strategy is bound eventually to beat a strategy that uses active management, where active management is characterized as trading that seeks to exploit mispriced assets relative to a risk-adjusted benchmark. The EMH has been refined over the past several decades to reflect the realism of the marketplace, including costly information, transactions costs, financing, agency costs, and other real-world frictions. The most recent expressions of the EMH thus allow a role for arbitrageurs in the market who may profit from their comparative advantages. These advantages may include specialized knowledge, lower trading costs, low management fees or agency costs, and a financing structure that allows the arbitrageur to undertake trades with long verification periods. The actions of these arbitrageurs cause liquid securities markets to be generally fairly efficient with respect to information, despite some notable anomalies.

This is an excerpt from the 4-volume dictionary of economics, a reference book which aims to define the subject of economics today. 1300 subject entries in the complete work cover the broad themes of economic theory. This extract concentrates on finance.

Thesis (M.A.) from the year 2004 in the subject Business economics - Investment and Finance, grade: 1 (A), University of Graz (Institute f r Industrial Economics), 99 entries in the bibliography, language: English, abstract: This Master Thesis gives an overview of the research into the efficient market hypothesis from its first days in the 1950s to the present. The discussion of theoretical models and concepts is being complemented by a review of relevant empirical evidence from international capital markets. The thesis is completed by a brief outlook on newer research venues, including models employing behavioural finance approaches.

This is the Black & White version of the book, available at a discount, which does not include the research data and analysis tables. There is also a Full Colour version that includes all the research data and analysis tables. What is a Stock Market? How do stock markets operate? Who invests in a stock market and when is it an appropriate tool for investment? Why do we care if a stock market is efficient or not? Where can we find evidence of market efficiency? With what tools can we test market efficiency?These are some of the questions that this book approaches. The Efficient Market Hypothesis (EMH) is a theory in financial economics, developed by Eugene Fama, which states that asset prices fully reflect all available information. Thus, it is implied that stocks always trade at their fair value, making it impossible for investors to "beat the market" via technical or fundamental analysis, since market prices should only react to new information.There are three variants of the EMH: "weak," "semi-strong," and "strong" form. The weak form of the EMH claims that prices already reflect all past publicly available market information. The semi-strong form claims that prices reflect all publicly available information, thus price changes occur to reflect new publicly available information. The strong form adds to this that prices instantly reflect even hidden private "insider" information.Testing the EMH is no easy task: Quantifying the availability of information and its effect on prices and market efficiency is challenging, making research on the subject difficult, time consuming and open to criticism. However, anecdotal evidence suggests that markets at best reach semi-strong form efficiency, with weak form efficiency being the norm. However, even this is challenged by the critics of EMH, via concepts such as Behavioural Finance.This book aims to familiarise the reader with the concept of EMH, covering the fundamentals and relevant literature. We then discuss market efficiency tests for Weak Form Market Efficiency, examining in more detail the day-of-the-week effect and its significance on stock market efficiency. The day-of-the-week effect is defined as a pattern where a certain day of the week has abnormal returns continuously. It is an anomaly that violates the random walk hypothesis, and thus implies that a market is not Weak Form efficient.We put theory into practice through the Empirical Research section which is divided into two parts, looking at two different approaches to researching the day-of-the-week effect, via the examination of actual research examples on a small European stock exchange. Both of these Thesis tested the hypothesis of random walk to determine the authenticity of weak form market efficiency for a small emerging stock market within the EU (the Cyprus Stock Exchange).

Essay from the year 2011 in the subject Business economics - Investment and Finance, grade: 1, University of Bradford (School of Management-Business School), course: Capital Market Investment And Finance, language: English, abstract: “In an efficient market, security (example shares) prices rationally reflect available information” (Arnold 2005, p.684). The efficient market hypothesis (EMH) refers to share price movement with respect to available information and thus no trader will be presented with an opportunity of making supernormal profits (except by chance), therefore their profits on a share will reflect the riskiness associated with that shares (Pike and Neal 2009). However, “detailed investigations using advanced econometric techniques, larger data sets, increasingly powerful computing ability, and alternative theoretical models have in the last few years revealed a range of anomalies when the unpredictability-of -returns hypothesis is tested. Financial markets are often predictable to some extent, but the crucial question is whether this predictability can be exploited to make excess profits from trading in the markets‖ (Mills 1992, as cited by Coutts, 2000, p.579). Warren Buffet, known as one of the most successful investors in history, is convinced that stock markets are inefficient. ''I think it's fascinating how the ruling orthodoxy can cause a lot of people to think the earth is flat. Investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn't do any good to look at the cards'' (Buffet, 1984, as cited by Davis, 1990, p.4). Buffet is referring to the fact that market price movements are often caused by emotional purchases and sales of stocks, resulting to an inefficient market, in other words, irrational market prices (Buffet, 1984). However, there are financial economists who see it the other way round. They agree with the “Efficient Market Hypothesis” which states that security prices rationally reflect only available information (Arnold, 2005, p. 684) (see fig 1) therefore inhibiting the possibility of beating the market. According to this theory, there does not exist under- or overvalued shares, only true and fair values. It is difficult to say which side is right and which side is wrong, as both are based on logical reasoning and transparent facts. This paper will therefore, evaluate both concepts using different theories and ideas from those for and those against the EMH in order to find a conclusion which is reasonable and flexible enough to support a constructive point of view (based on pragmatism) and to better understand if Buffet‟s statement is true or false or maybe both.