Wait a second!
More handpicked essays just for you.
More handpicked essays just for you.
Validity of efficient market hypothesis
Validity of efficient market hypothesis
Efficient market hypothesis evidence
Don’t take our word for it - see why 10 million students trust us with their essay needs.
Recommended: Validity of efficient market hypothesis
Introduction
Efficiency of financial markets is one of the main topic in finance area for researching and testing. Many economist has done lots of research on this important area and intent to find out a best way to illustrate the outcome to define the financial market. In recent years, the research and the testing has become the basis of the investors to examine the investment stages. This move is important since the market can change in any time.
The concept of the Efficient Market Hypothesis is defined as there are many potential investors in the market who try to compete with each other by predicting the future of the stocks of the company or any other financial securities, which the information of the company were available for all the investors and the price of the securities and the stocks are reflected to the information that the company disclosure correctly. (Eugene. F , 1965)
Efficient Market Hypothesis can be divided into three different stages, weak form of efficiency, semi-strong form of efficiency and strong form of efficiency. By examine the researches and testing, this essay aims to compare three different form of efficiency market hypothesis and the empirical studies which have conducted to assess the validity of each forms.
In this essay, it will contain three main part to illustrate the researches and compare between the three forms of efficiency included the Random Walk Theory. In first, we will examine about the Random Walk theory and see how it will affect the stock price in weak form of efficient markets hypothesis. Follow by the evaluation of the empirical studies in the weak form of efficiency.
Secondly, explain and compare the semi-strong form of the efficient market hypothesis differs from the weak ...
... middle of paper ...
...
However, insider trading is illegal in recent year which restricted by the law since it is not fair to the other small investors. (Seyhun, 1986)
Conclusion
Efficient Market Hypothesis is an important step on predicting the future price of the stocks or securities in short-term. By applying the new information in order to react to the business can help to identify the direction of the stock price and gain return. Although the result may fail the investor in long-run but for the investors who intend to invest in short-run are still useful. React to the favourable or unfavourable information for the company can help to adjust the overprice or under priced stocks in order to maintain the balance in the market. Since the EMH can still be the basis of the prediction of the stock price, EMH is still viable for the investors to study and examine before the investment.
Before we invested, we decided to pick two types of companies to invest in. We would choose companies that had expensive stock but steady increasing prices and we would choose smaller companies that had cheaper stock but whom had a chance for potential huge price increases. If the smaller companies’ stock went down the bigger companies’ steadily increasing stock would even it out, but if the smaller companies’ stock price rose greatly, like we predict, we could sell and make a good profit. We found a big name company that had reliable stock prices pretty quick, but finding a small company whose stock price could rise was hard. We
There are many instances of insider trading that have taken place in the U.S. stock exchange. The Federal Reserve and The Federal Government have clearly stated that insider trading undermines the law and is illegal, but individuals insider trade anyway.
Insider trading is the act of purchasing or selling securities based on material, nonpublic information. Information is consider to be material if a reasonable person would use it in such a way that would persuade them to partake in an exchange of securities, or if it was reasonable to believe that it would affect the market price of a security once the information has become public (Carlin 2003). Information can only be acted upon once it has been made public, otherwise, unfair trades would take place that could negatively affect the general public and shareholders of the company. Those who are employees of the company upon employment have a signed agreement to put the interests of the shareholders first. Acting on tips from within the company or other sources could negatively affect the corporation’s success, resulting in a shareholders loss.
The use of insider information is illegal in the United States. Insider information is stock related information that can be obtained many ways to gain large, abnormal gains in the stock market. A popular way to gather inside information is from direct employees of the company. Information on stocks can either be illegal or legal. If the information is publicized for all current or future investors to use, then it isn't illegal. Illegal information becomes unlawful when it becomes privatized from the public, and to be only used by investors in the stock market. The action of using insider information isn’t considered illegal until the information is used in a stock market located in the United States, most commonly the New York Stock Exchange, or NYSE. Investors shouldn't need to worry about whether the information they’re given is illegal. Instead, the government should become lenient and abolish the act that prohibits investors to use insider information. Investors need to come together to protest against congress. If we abolish the act that forbids investors to use inside information, then the economy in general will grow from the freedom given by the government.
The U.S. Securities and Exchange Commission (SEC) differentiate insider trading into to legal and illegal behavior. The aspect of legal conduct involves members of corporations that purchase and trade stocks of their companies. This is common practice; however all transactions must be reported to the SEC (SEC, n.d.). This essay will focus on the illegal component of insider trading. Criminal investigation of insider trading will be discussed in addition to the prosecutions of various individuals who have been convicted of insider trading. Furthermore, the federal statute of insider trading will be examined in relation to Martha Stewart’s actions in selling her ImClone stock.
The efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments . In reality once cannot always achieve returns in excess of average market return on a risk-adjusted basis. They have been numerous arguments against the efficient market hypothesis. Some researches point out the fact financial theories are subjective, in other words they are ideas that try to explain how markets work and behave.
Insider trading has been a commonly discussed topic since Martha Stewart was accused, tried, convicted, and served a prison term for her involvement with the Inclon trading scandal. However, the definition of the term “insider trading” is not necessarily always connected with illegal activity. As a matter of fact, in some jurisdictions, “insider trading” is no crime. Traditionally, it has been an expected, and perfectly acceptable prerequisite for certain sorts of employment. ”(Insider Trading).
Second, the efficient market hypothesis cannot explain market anomalies. These market anomalies include the pricing/earnings effect, the size and January effect, the monthly effect, holiday effect and the weekend effect. These anomalies indicate either market ineffici...
Market efficiency signifies how “quickly and accurately” does relevant information have its effect on the asset prices. Depending upon the degree of efficiency of a market or a sector thereof, the return earned by an investor will vary from the normal return.
Sung C. Bae, Taekho Kwon, and Jongwon Park, 2004, Futures Trading, Spot Market Volatility, and Market Efficiency: The Case of the Korean Index Futures Markets, Journal of Futures Markets 24, 1195-1228
The Contestability of a Market A contestable market is a market where an inefficient firm or firms, which is earning excess profits, is likely to be driven out by more efficient or less profitable rival. A market can be contestable even if a single firm, which appears to enjoy a monopoly with market power, dominants it and the new entrant exists only as potential competition. The threat posed by the new entrants in the market is taken to be a key reason for the firm's behaviour in the market. There are many factors that can affect the contestability of the market.
He also mentioned that through his research he found out that insider trading law is associated with a lower ownership concentration at the firm level. Insider trading also affects the corporate governance. Furthermore, the insider trading law is optimistic related to market liquidity might help address rival claims about the effect of insider trading on overall market efficiency and in particular on market liquidity. Therefore, insider trading is inefficient and harmful to equity markets and must to be subject to government regulation. Some commentators argue that insider trading is indeed harmful and therefore that (some forms of it) ought to be prohibited through regulation.
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
In turn everything in the present and the future is judged through the stocks as they hold a high importance in industrialized economies showing the healthiness of said countries economy. As investing discourages consumer spending over all decreases, it lead...
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.