Since the existence of stock markets, people tried to formulate models that reflect and deal as a guideline to understand how markets function. The concept of market efficiency is a major and broadly accepted hypothesis that mainly developed since the formulation of the market efficiency hypothesis by Eugene Fama, in 1970. Although the term market efficiency to economists is also a broadly known term referring to operational efficiency, this paper concentrates on the efficiency of stock markets or to be more precise the informational efficiency of the stock market. Fama stated that in an efficient market the prices of stocks reflect all available information at any given time. His conclusion due to that fact is that it is not possible to outperform the market by selection. Since this theory was formulated it was continuously challenged towards the reality through event studies that examined its applicability to the stock market. In this paper, the development and nature of the EMH will be discussed focusing on publications that examined the market to test for the three levels on market efficiency. In the last section of the paper, the EMH will be challenged to observations of effects that the EMH can not explain. For example, the discovery of seasonalities that show us that there are timeframes in which the market performes better than in others. Among that other anomalies of the stock market are reviewed and their applicability to the thesis of the market efficiency hypothesis will be examined. The last section of the paper deals with the blind spots the EMH and tries to give answers where the shortcomings of the model can be discovered in analysing the human behaviour. 2 The efficient market hypothesis 2.1 Th... ... middle of paper ... ...hodological Suggestions”, Journal of Finance, 44, pp. 1-10. Samuelson, Paul (1965). "Proof That Properly Anticipated Prices Fluctuate Randomly". Industrial Management Review, 6, 41–49. Shiller, Robert J. (2003). “From Efficient Markets Theory to Behavioural Finance”, Journal of Economic Perspectives, pp. 100-103 Volcker, Paul (2011). "Financial Reform: Unfinished Business”, New York Review of Books, Retrieved December 28, 2013 from http://www.nybooks.com/articles/archives/2011/nov/24/financial-reform-unfinished-business/ Working, Holbrook (1960). “Note on the Correlation of First Differences of Averages in a Random Chain”, Econometrica, 28, pp. 916-918. Quiggin, John (2013). "The Bitcoin Bubble and a Bad Hypothesis", The National Interest, Retrieved December 27, 2013 from http://nationalinterest.org/commentary/the-bitcoin-bubble-bad-hypothesis-8353
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The Dodd-Frank Wall Street Reform and Consumer Protection Act’s policies haven’t really been implemented to the extent that regulators would have liked. Although the legislation takes many steps in addressing systematic risks in the United States financial system and improving coordination among regulators, some critics believe that alternative options might have been more effective. The coming years will give us a better understanding of how well the Dodd-Frank Act addressed these concerns.
Princeton, 1963. Hailstone, Thomas and Rothwell, John. Managerial Economics, pp. 93-95. Prentice Hall, 1993.
“The Economist Explains, How Does Bitcoin Work?” The Economist (2013): n. pag. Web. 08 Apr. 2014.
Efficient market hypothesis was developed by professor Eugene Fama at the University of Chicago Booth School Of Business as an academic concept of study through his published Ph.D. thesis in the early 1960s . Fama proposed two crucial concepts that have defined the conversation on efficient markets in his thesis. The efficient market hypothesis was the prominent theory in the 1960s, Fama published dissertation arguing for the random walk hypothesis to support his efficient market theory. “Fama demonstrated that the notion of market efficiency ...
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O'Sullivan, A., & Sheffrin, S. (2005). Economics. Upper Saddle River, New Jersey: Pearson Prentice Hall.
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.
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
...his fact is utilized by the investors to plot wining strategies. Furthermore, the evidence from this study suggests that it is not necessary to know predictable patterns and market inefficiency in order to implement profitable investing strategies. Taken together, these results suggest that investors are able to achieve higher returns and minimize transaction cost by adopting indexing strategy which mimics the market. The second major findings are the contrasting view of behavioral finance. Two decades ago, many financial economists supported the Efficient Market Hypothesis because of the forces of arbitrage. Today it can be realized that it was indeed a very naive view and the limits of arbitrage can result in substantial mispricing. Thus through this research it is understood that absence of profitable investment strategy does not infer the absence of mispricing.
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
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.
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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.