This is based on the ideal of ‘a balancing act’, where markets are regarded as knowing the best means forward. However, skeptics of the above, view markets as being necessarily inefficient due to the various forms of risks involved. The reasoning behind the aforementioned theory is that a free and competitive market arena does place various pricing indices to their true basic values. Lo (2007), provides that the Efficient Markets Hypothesis (EMH) does showcase the fact that market pricing indices do fully reflect all available data. This however does not eliminate critique, especially from behavioral economists and psychologists, who view it as being founded on assumptions which are counter-factual, especially with regard to human behavior/ rationality. A distinction is made between technical and fundamental analysis of stock pricing indices. The former, entails the utility of volume charts and geometric patterns in pricing, towards forecasting a given security’s future price fluctuation. The latter on its part, is concerned with the utility of both economic and accounting data, towards determining a given share’s fair valuation. Pegged on this assumption is the fact that as the existing market enhances overall efficiency, so does the price sequencing become completely unpredictable and random (Lo, 2007:17). As Shiller (2013) provides, though humanity continues being influenced by past global occurrences in the market arenas, this does not in any way remove the presence of existing market anomalies. The fact that the South American state of Colombia continues experiencing a real-estate bubble, which is ongoing, is representative of the volatility of the current market sector. With its real-estate pricing index rising by 69%, in terms of inflation-adjusted calculations, it provides a crucial insiders’ view of how market inefficiency continuously evolves. Rationality in individuals’ participation in various economic bubbles is educated by amongst others, the price increases as a result of the prevailing psychological contagion. It is this fundamental human aspect, which promotes a given mindset of justifiable price increases, thereby spurring fervent market activities. Due to the inherent nature of
THE STOCK MARKETS ARE EFFICIENCY ACCORDING TO THE EFFFICIENT MARKET HYPOTHESIS by Course Tutor Institution Department Date Stock markets are critical players in the economic makeup of various social groupings, necessarily so due to their controlling factor of economic activities globally…
The author states that three types of efficient markets are based on certain assumptions and certain hypothesis. The weak-form efficient market hypothesis is based on assumption that current prices of stocks represent the full historical information. The technical analysis would not yield superior risk-related amounts of returns.
Efficient market hypothesis stipulates that the prices of stocks in the money markets represent summation of all probabilities of all future consequences. The information available in the public domain is assumed to reflect stock prices in the money markets.
Hence, the EMH is of little relevance to corporate managers.’ Explain and discuss this contention. The efficient market hypothesis is a proposition which articulates that the market prices of security are a reflection of available information to the members of public.
The Efficient Market Hypothesis maintains that all the stocks are perfectly priced in accordance with their inherent investment properties, and the knowledge of all these properties is possessed equally by all the market participants. In short, the price of a stock is an accurate reflection of all the market information available.
One way that the investors do this is to participate in the stock market. The stock market is a market where limited companies issue and sell their shares to the interested investors. Trade of shares is an important element in a country with a free economy.1 Through this, the companies get capital, and in return, the investors have some form of ownership in that particular company.
Basu illuminates that "in an Efficient Capital Market security prices fully reflect available information in a rapid and unbiased fashion" (1977, p663) This suggests that stock price, at a specific moment, reflects all the information that is available and the events that are announced.
The efficient markets hypothesis forms the basis for one of today’s major theories of the trading and valuation of financial instruments such as corporate stocks and bonds, as well as many other forms of equity or debt. It is vital for investors, traders, analysts,and others dealing with such instruments to understand how their values are determined.
With the market running a series of exceptional returns, an efficient market hypothesis can best explain the random behavior of stock markets and data.
Linkages between the equity markets of both countries are strong since the equity market of countries like China, Hongkong, Australia, New Zealand, Malaysia and Singapore are highly integrated with Japan's stock market since 1994.
Investors will therefore make normal profits. According to this hypothesis, any new information that can influence the prices of securities will spread randomly to all investors. The weak form hypothesis argue that the