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Efficient Market Hypothesis - Case Study Example
Author : agottlieb
Pages 8 (2008 words)
Efficient Market Hypothesis (EMH) holds that stocks or shares trade at their fair value thus preventing buyers and sellers from gaining unduly from market inefficiency. In other words since the market functions efficiently investors cannot buy undervalued shares or sell overvalued shares…
In fact investors can predict the future stock prices, based on the past stock prices and even by analyzing financial information such as company earnings and asset values. This paper would examine the relationship between EMH and the future predictions of stock prices based on technical and fundamental analysis.
When stocks rose by high percentages the analysts could say that it was due to the efficacy of stock markets and therefore the positive rally reflected the true performance of the company. Efficient markets do exist in theory (Dobbins, & Witt, 1979). For example according to financial theory there are efficient stock markets that especially don't permit market manipulation by investors. However the practical scenario negates this proposition very often. For instance the rally of the stock could be attributed partially to the equity issue and not to the efficiency of the markets.
According to many financial economists that future stock/share prices are partially predictable on the basis of past stock price patterns as well as some fundamental valuation metrics. Further economists pointed that these predictable patterns lead investors to earn excess returns with reference to excess risk adjusted rates. The following three problems explain why excessive reliance on fundamental financial analysis isn't going to benefit the investor or shareholder.