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Efficient Market Hypothesis - Assignment Example
Author : labadieadolph
Finance & Accounting
Pages 4 (1004 words)
Efficient Market Hypothesis Customer Inserts His/ Her Name here Efficient Market Hypothesis The EMH (Efficient-market hypothesis) in finance affirms that financial markets are performing efficiently on the basis of certain information…
Among the foremost to apply digital computers to perform empirical research in the field of finance, Fama operationally defined the EMH by pointing structure on several information sets accessible to market players. The efficient-market hypothesis necessitates that the agents should expect rationally that on average the overall population is correct (although if no individual is) and each time new pertinent information comes out, the agents should update their anticipations appropriately. Moreover, agents are not needed to be rational. EMH permits that on facing novel information, some investors may under react while some, on the other hand may over react. But, they are necessitated by EMH to react in a random manner that follows standard normal distribution. So, the overall impact on market prices may not be constantly exploited to attain more than usual profit, particularly, while keeping into consideration the transaction costs (including spreads and commissions). Therefore, any individual may be perceived to be incorrect regarding the market but, market, on the contrary, as a whole is considered to be always correct.
Three levels of hypothesis
The efficient market hypothesis can be commonly stated in three basic forms. These include weak-form, semi-strong form and strong form efficiency. Each of these provides distinct implications for the way market performs. ...