In this way, only information bears the power to move market prices.
There happens to be three levels of market efficiency as delineated by Fama (1970) viz. weak, semi-strong and strong. According to Fama (1970), weak form of market efficiency that market prices are affected by a stock's past performance and previous returns. The semi strong form of market efficiency suggests that market prices reflect all the available information. This degree of market efficiency exists when there are no under or over valued securities in the market and when new information affects market prices very rapidly. The strong form of market efficiency elaborates that all types of information, whether public or private, affects market price of securities. Despite the importance of the Efficient Market Hypothesis, its validity is highly debatable in the literature which is discussed in this essay.
According to the Efficient Market Hypothesis, stock prices move in negative and positive directions while responding to information and announcement of events. However, there has been staunch concern owing to market anomalies that indicate deviations from Efficient Market Hypothesis such as Holiday effect [e.g. Ariel (1990)], Monday effect [e.g. French (1980)], November effect [e.g. Bhabra, Dhillon and Ramirez (1999)], January effect [e.g. Bhardwaj and Brooks (1992)] and P/E ratio effect [e.g. Basu (1977)]. Critics are also of the view that movements in stock prices also reflect psychological factors and irrationality on the part of investors [e.g. La Porta, Lakonishok, Shliefer, and Vishny (1997), Shleifer and Summers (1990) etc.]. There has also been significant evidence that economic conditions great affect stock returns [e.g. Schwert (1989)]. The following paragraphs examine the Efficient
There has been significant interest on the part of scholars and academicians as to the causes behind movement of stock prices and their predictability. The Efficient Market Hypothesis suggests that stock prices tend to move because of available information…
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 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.
It states that the financial markets are usually efficient in terms of providing the right information to the investors.
It also stipulates that the price of traded assets consists of information that is available for use. The example of traded assets involves; stocks, bonds and the properties.
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