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The concept of the efficient market hypothesis - Essay Example

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The concept of the efficient market hypothesis

Furthermore, the change in the currently set prices are would only arise once the new information would land into the market (Ullrich & Ullrich, 2009). The definition of Malkiel (1992; 2003) can be stated as the comprehensive version of the Jensen’s (1978; 1969) idea. Jensen (1978) clearly defined the market efficiency as the state of the market where incremental profits cannot be made by incorporating element of exclusive information in the trading strategies (Timmermann & Granger, 2004).Clearly, the definition put forward by the Malkiel (1992) has three points of emphasis for determining the market as efficient. First, the importance attributed to the information in pricing the units in the financial market. Second factor of emphasis in the definition refers to the capability of the stock market trader or the participants to exploit the exclusive information for generating additional economic profits. Finally, the yardstick to measure the efficiency of market with respect to EMH in term of risk adjusted return net of additional transaction cost (Timmermann & Granger, 2004).Unlike the definitions presented by Jensen (1978) and Malkiel (1992), the proposition concept put forwards by the Fama has many limitations. In fact, Fama was self well aware of the vague component as the fully reflect does not determine any standards for empirical tests (Guerrien & Gun, 2011). LeRoy (1976: 1989) was first to claim the lacking in the definition of the Fama and claimed that definition of the market efficiency....
The definition of Malkiel (1992; 2003) can be stated as the comprehensive version of the Jensen’s (1978; 1969) idea. Jensen (1978) clearly defined the market efficiency as the state of the market where incremental profits cannot be made by incorporating element of exclusive information in the trading strategies (Timmermann & Granger, 2004). Clearly, the definition put forward by the Malkiel (1992) has three points of emphasis for determining the market as efficient. First, the importance attributed to the information in pricing the units in the financial market. Second factor of emphasis in the definition refers to the capability of the stock market trader or the participants to exploit the exclusive information for generating additional economic profits. Finally, the yardstick to measure the efficiency of market with respect to EMH in term of risk adjusted return net of additional transaction cost (Timmermann & Granger, 2004). Unlike the definitions presented by Jensen (1978) and Malkiel (1992), the proposition concept put forwards by the Fama has many limitations. In fact, Fama was self well aware of the vague component as the fully reflect does not determine any standards for empirical tests (Guerrien & Gun, 2011). LeRoy (1976: 1989) was first to claim the lacking in the definition of the Fama and claimed that definition of the market efficiency as the repetition of same concept in different dimension. The criticism from LeRoy (1976) was also admitted by the Fama (1976). In addition to the criticism about the lacking in the presentation of idea, the first criticism about the idea itself appeared in the year 1973 by Shiller (Guerrien & Gun, 2011). Shiller (2003) pointed to the difference which is statistically significant about the true value and assessed ...Show more

Summary

The aim of this paper “The concept of the efficient market hypothesis” is to develop critical review of the concept definition, historical development, assumptions and the types of the EMH. All these aspects alongside determine the associated criticisms.

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