The Efficient Market Hypothesis and its Critics
efficient market hypothesis and its critics
“The Efficient Market Hypothesis and Its Critics ..
The strong form of market hypothesis is the least realistic and the least tested. It is something that can hardly be ever seen in the real stock market. As proposed by Fama (1970) “the preceding discussions have already indicated the existence of contradictory evidence. In particular, Neidholfer and Osborne have pointed out that the specialists on the N.Y.S.E apparently use their monopolistic access to information concerning unfilled limit orders to generate market profits..” (Fama, May 1970). In particular this form of market efficiency is the least likely to be true. No further work was done on strong form of market efficiency.
Attractive as this line of reasoning may be in theory, it is unfortunately well-nigh impossible to test it in practice with any degree of academic rigour.Critics of EMHFor about ten years after publication of Fama's classic exposition in 1970, the Efficient Markets Hypothesis dominated the academic and business scene.
The efficient market hypothesis and its critics
In summary, the professional views and academic studies discussed above show that the financial economics is split into two corners, one which is highly skeptical, even of the weak-form of market efficiency, and the second side, which agree with Fama in regards to the efficient market hypothesis, especially the semi-strong form of efficiency. The key arguments are discussed here:
Semi-strong efficient market uses all the historical prices and the all publicly available information. If there is any new information in the market, the prices of the stock will adjust instantaneously to reflect the fully available information. This new information could include stock splits, mergers and acquisitions, issuance of new securities or debt, change in bank and government interest rates, GDP, inflation and more. The study by Fama, Fisher, Jensen and Roll , , was on the integration of new information into the stock prices. They researched 940 firms over the period of 1927 to 1959 to determine effect on stock prices after stock splits. Their hypothesis is that the stock splits do not provide any new quantitative information about the firm. They found that the firms chose to declare stock splits in “abnormally good times”. However there was little movement noticed after the stock split because the market anticipated increase in dividends. They found that approximately 71.5% of the total stocks covered increased dividends, but the ones that did not increase dividends or reduce dividends saw their stock prices go down as a result of lower market expectations. FFJR concluded that the data emphasizes that the stock market is efficient, and it fully adjusts to the new publicly known information of the stock split (Fama, Fisher, Jensen, & Roll, 1969). Groenewold and Kang discuss in their paper, that the Australian market shows signs of semi-strong efficiency. They conducted their research using macro-economic data, as compared to micro-economic data being used by FFJR. Grownewold and Kang use share prices, money supply, real government expenditure and the price level as data inputs from the sample period of 1982 to 1988. The research concluded that the lagged returns have no significant joint explanatory power in regressions for share returns.
Human Knowledge: Foundations and Limits
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The last form of the EMH is also the stringiest form of efficiency, where it dictates that share prices incorporate all private and public information. Due to its rigour, this hypothesis is seldom accepted, and it is rarely true. There is lack of sufficient evidence that strong-form efficient is possible in any market. This paper is going to focus primarily on the weak and the semi-strong form of the EMH.
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The research on market efficiency includes a wide array of quantitative and mathematical analysis, along with behavioural studies. This paper, however, does not focus on the mathematical analysis itself, but the results and the conclusions of the various researches. The paper will begin with a brief background on the definition of efficiency, including the various forms of efficient markets. It will use the groundbreaking research paper by Fama, written in 1970, to discuss the proposed degrees of market efficiency. The paper will later discuss the various academic and professional views on the efficient market hypothesis (EMH) and the degree of the market efficiency. Finally, the paper will combine the various academic and professional findings and analyze these studies to conclude on the degree of the market efficiency.
12/04/2008 · This web site started in 2003
In , the efficient-market hypothesis (EMH) asserts that are "informationally efficient". The weak version of EMH suppose that prices on traded assets (e.g., , , or property) already reflect all past publicly available information. The semi-strong version supposes that prices reflect all publicly available information and instantly change to reflect new information. The strong version supposes that market reflects even hidden/inside information. There is some disputed evidence to suggest that the weak and semi-strong versions are valid while there is powerful evidence against the strong version. Therefore, according to theory, it is improbable to consistently outperform the market by using any information that the market already has, except through inside trading. 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. The hypothesis has been attacked by critics who blame the belief in markets for much of the , with noted financial journalist declaring "The upside of the current Great Recession is that it could drive a stake through the heart of the academic nostrum known as the efficient-market hypothesis."
Efficient markets hypothesis - Wikinvest
The (c. 201 to 145 mya) and (c. 145 to 66 mya) periods spanned the Golden Age of Dinosaurs. The human fascination with dinosaurs is primarily due to their great size. They were Earth’s largest land animals ever, by far. Huge predators hunted even larger herbivores. Prosauropods, or , were and were the early Jurassic’s dominant herbivorous dinosaurs, but their four-legged descendants, , supplanted them by the mid-Jurassic and sauropods became Earth’s largest land animals ever. Some species may have weighed more than , which would have rivaled the , which is generally considered to be the largest animal that ever lived. The blue whale achieved weight primacy, but the sauropods’ vast dimensions are still awe-inspiring. Some were up to and could reach . Some of the largest sauropods ever lived in the late Jurassic, when they were most numerous, but huge sauropods . A prominent hypothesis is that their tremendous size was a strategy for digesting lower-quality food sources; they could digest food for a longer period as it wound its way through their digestive systems. Their size also discouraged predation and . But their highly efficient air sac breathing system may have been the main reason why they could get so large, particularly in the record-low oxygen Jurassic Period, at least according to .
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