The Efficient Market Hypothesis

740 Words2 Pages
bulb-icon

Recommended: What the efficient market hypothesis proposed

The Efficient Market Hypothesis suggests that market prices fully reflect all information available to the public. However, practitioners and regulator are uncertain as to the validity of this hypothesis. The questions that Bloomfield raises are: If market prices truly reflect information, why do investors waste efforts by trying to identify mispriced stock prices? Why do managers try to hide bad news in footnotes? And why do regulators try to prevent them from doing this? Robert J. Bloomfield presents an alternative to EMH called the Incomplete Revelation Hypotheses. IRH suggests that statistical data which is more costly drives fewer trading interest. Therefore information that is more costly to extract from publicly available information is not fully reflected in the market prices.
Information is hidden due to noise traders trading randomly. This noise creates a balance where a sufficient amount of investors purchase costly information in order to make gains equal information collection costs. IRH also implies that the more informed investors there are, the more complete market prices will be and the smaller the gain will be for each investor trading on that knowledge. If there are very few informed investors, the gain will outweigh the cost of extracting that information. Likewise, if there are too many informed investors, the gain will not be sufficient enough to cover the cost of that information. Therefore equilibrium requires less traders collect costly information.
Bloomfield stresses the use of statistics extracted from data rather than the use of data itself. Few investors’ trade based on costly statistics, which means markets do not reflect these costly statistics completely. These statistics are also data which many t...

... middle of paper ...

...act costly information because the costs surpass the gains, so trading on less information doesn’t always imply irrationality. Nevertheless traders can also make noise based on their irrational and unpredictable changes in feelings.
The reliance on unreliable data, aggressive trading by investors with little information and the collection of inappropriate information helps to understand overreactions.
Conclusion
Many people believe the efficient market hypothesis is inefficient and Bloomfield presents an alternative to this hypothesis. Bloomfield posits the meaning of costly statistics is not fully revealed in the market. Some investors put more importance on some statistics rather than others which indicates that some statistics are less exposed in market prices. IRH essentially extends EMH by identifying extraction costs of statistics from publicly available data.

Show More
Related

  • Commentary on Moneyball: The Art of Winning an Unfair Game by Michael Lewis

    1196 Words  | 3 Pages

    ...o rational decisions being made. Eventually, the team experience huge financial losses (Thaler & Sunstein, 2003).

    Read More

  • The Great Crash 1929 Book Review

    1608 Words  | 4 Pages

    It is often said that perception outweighs reality and that is often the view of the stock market. News that a certain stock may be on the rise can set off a buying spree, while a tip that one may be on decline might entice people to sell. The fact that no one really knows what is going to happen one way or the other is inconsequential. John Kenneth Galbraith uses the concept of speculation as a major theme in his book The Great Crash 1929. Galbraith’s portrayal of the market before the crash focuses largely on massive speculation of overvalued stocks which were inevitably going to topple and take the wealth of the shareholders down with it. After all, the prices could not continue to go up forever. Widespread speculation was no doubt a major player in the crash, but many other factors were in play as well. While the speculation argument has some merit, the reasons for the collapse and its lasting effects had many moving parts that cannot be explained so simply.

    Read More

  • Modigliani And Miller's Theory: The Perfect Conditions Of The Market

    735 Words  | 2 Pages

    The results obtained from the cooperation of Modigliani and Miller in 1958, was an attempt to prove that the financial decisions should not be significant in the perfect conditions of the market, after being published the Modigliani and Miller theory became the main theory of the capital structure.

    Read More

  • Dan Ariely's Predictably Irrational

    1155 Words  | 3 Pages

    For decades, people believe that our economic system is operated by statistics, followed by a series of numbers and calculations. Economists gather price information, evaluate advantages and disadvantages, and find the best solution to outpace competitors. They believe people usually behave rationally. However, as the concept of behavioral psychology emerged in the economic world, economy has been viewed in a different perspective. Behavioral economists speculate that people are irrational reactors instead of rational actors.

    Read More

  • Beta Essay

    940 Words  | 2 Pages

    The concept of beta has gained prominence due to the pioneering works of Sharpe (1963), Lintner (1965) and Mossin (1966). There are many studies that examine the behaviour and nature of beta. These studies include the impact of the length of the estimation interval, the stability of individual security beta as compared to portfolio beta, factors influencing the beta as well as the stability of beta in various market conditions.

    Read More

  • The Great Depression Essay

    1508 Words  | 4 Pages

    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...

    Read More

  • Highly Popular Stocks

    1642 Words  | 4 Pages

    Stock analysts hunt for stocks that will be appealing to their readers. Stocks with rising prices seem to be emphasized in their newsletters. It is safer to write about them, particularly if others are doing it also. How can a writer be singled out for making a mistake if everyone else is making the same mistake? This does not get around the fact they are often wrong.

    Read More

  • Essay On Capital Asset Pricing Model

    1344 Words  | 3 Pages

    According to Perold (2004), ‘CAPM can be served as a benchmark for understanding the capital market phenomena that cause asset prices and investor behavior to deviate from the prescript...

    Read More

  • Nike Report

    962 Words  | 2 Pages

    3) Game theory assumes consumers would make rational decisions, but as we all know, feelings often disrupt our rational decision-making processes, often resulting in irrational choices that we perceive as satisfying.

    Read More

  • Impact Of Stock Split On The Stock Return

    1771 Words  | 4 Pages

    The efficient market hypothesis states that it is not possible to consistently outperform the market by using any information that the market already knows, except through luck. Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future.

    Read More

  • The Importance of Proper Asset Allocation

    1614 Words  | 4 Pages

    Hensel, C. R., Ezra, D., & Ilkiw, J. H. (1991). The Importance of the Asset Allocation Decision.

    Read More

  • The Mechanics of War

    1681 Words  | 4 Pages

    Recently a new trend has taken up Wall Street. Savvy broker firms have realized that the market is probably controlled by some rules, and those rules have to be found to make more money with the least risk. They hired many mathematicians to look for any formulas that would seem to express the market. Those analyzed previous market trends and used laws of statistics to try to predict the “future” of the market. The funny thing is that at times this approach actually worked. It yielded a slightly more than fifty percent accuracy, and that was enough. (When dealing with tremendous amounts, even a small percentage is not meager.)

    Read More

  • Prospect Theory And Prospect Theory

    1036 Words  | 3 Pages

    One reason is that many successful investment ventures itself is the outcome of these ‘irrationality’. Risk-taking, which is inevitable in investment, may contribute to the investors’ better performance than others, while with the assistance of proper training, assessment accuracy can be increased(Palich and Ray Bagby, 1995). Also, if without precedent, most of the newly-invented value-maximising approaches or strategy of investment ought to be considered as crude and unthoughtful, but in reality, they are regarded as innovation(Busenitz and Barney, 1997). Furthermore, there are evidence shows that instead of being the hindrance of correct investment decision-making, those biases and heuristics are backed up by probabilistic information. Accurate statistical probability can be evaluated by our inductive reasoning mechanism with a relatively high possibility(Cosmides and Tooby,

    Read More

  • A Random Walk Down Wall Street

    3851 Words  | 8 Pages

    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.

    Read More

  • The Efficient Market Hypothesis

    774 Words  | 2 Pages

    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.

    Read More

More about The Efficient Market Hypothesis

Open Document