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Finance For Management - Essay Example

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Finance For Management

This part of the paper seeks to analyse the Jensen argument in 1978, quoted by Pike& Neale that the efficient market hypothesis is the "best established fact in all of social science". Whilst Neale & McElroy (2004) were less categorical "sometimes stock market valuations may look irrational. But in the longer term the markets are efficient processors of information and get valuation about right"
Numerous papers have demonstrated that early identification of new information can provide substantial profits. Insiders who trade on the basis of privileged information can therefore make excess returns, violating the strong form of the efficient market hypothesis. Even the earliest studies by Cowles (1933,1944), however, make it clear that investment professionals do not beat the market. It has already been stated that an efficient market is one where the prices of securities fully reflect all available information, but then what are the sufficient conditions for capital market efficiency In an idealized world, such conditions would be
the debate about market efficiency has resulted in thousands of empirical studies and literature attempting to determine whether particular markets are in fact 'efficient', and if so to what degree. In fact, the majority of studies and researches of technical theories have gone to the result that it is difficult to predict prices. No wonder, Neale & McElroy (2004) were less categorical, and stated that "sometimes stock market valuations may look irrational. But in the longer term the markets are efficient processors of information and get valuation about right"

In addition, the random walk theory indicates that price movements will not follow any trends and so by knowing the past price movements it's not possible to predict the future price movements. All these state that markets are in fact efficient. However, researchers have also exposed many stock market anomalies that seem to be inconsistent with the efficient market hypothesis.

This section attempts an analysis of Michael Jensen 1978 arguments on the efficient market hypothesis. An attempt was also made to reconcile this statement with Neale & McElroy 2004 statement. From the above analysis, one can gently conclude that trading strategies seem to be widespread among fund managers and there is little evidence that they would generate excess returns in practice (Malkiel, 2003). Researchers have also exposed many stock market anomalies that seem to be inconsistent with the efficient market hypothesis. The end of the year effect, small firm effect is all good examples to this effect.

The efficient market hypothesis has been challenged by numerous studies on the grounds that there are often underrreactions or overreaction of stock markets to information. (Baberies et al, 1998; Daniel et al, 1998; Hong and Stein, 1999). Accordingly, in a variety of markets, sophisticated investors can earn ...Show more


The efficient market hypothesis indicates that since market prices reflect all available information, containing information about the future, the only difference between the stock prices at time t and time t + 1 are phenomenon that can not possibly be predicted…
Author : octavia61
Finance For Management essay example
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