Analysis of the Efficient Market Hypothesis
Name: GAO FAN
Student Number: 139030647
Programme Title: Analysis of the Efficient Market Hypothesis
Module Title: FOUNDATIONS OF FINANCIAL ANALYSIS AND INVESTMENT (MN7022)
Assignment Question: Critically review and discuss the concept of market efficiency and empirical approaches to test for it.
Words number: 2994
Analysis of the Efficient Market Hypothesis
INTRODUCTION
The study of “efficient market hypothesis” is originate from Louis Bachelier (1900), he studied the “Brownian motion” and the randomness of the stock price change from the perspective of random process and he found that discounted value reflected in market prices that no matter in the past, present or in the future (Lim & Brooks, 2009). With the use of computer, Kendall (1953) finds that the randomness of stock price changes by the commodity prices and stock prices in Britain and the United States (Lim & Brooks, 2009). Later, Robert (1959) proves that there is no difference between a sequence from the random sequence and the share price of the United States (Lim & Brooks, 2009). In 1964, Osborne puts forward the “random walk theory”, he believes that the change of stock price is similar to the molecular chemistry “Brownian motion” which means that the movement of the particles that suspended in a liquid or gas is continual and chaotic, and that means the change of stock price is unpredictable (Lim & Brooks, 2009). In 1970, Eugene Fama thinks that there is no “memory” of yield sequence of the stock price in statistics and inventors cannot predict its future direction based on the historical prices then Fama presents the efficient market hypothesis in 1970 (Lim & Brooks, 2009). The definition of the efficient market is that if the prices fully reflect all available information in a securities market that is called the economic market (Dimson & Mussavian, 1998). Refers to the efficient market hypothesis theory, the security price can reflect all relevant security information sensitively,
Student Number: 139030647
Programme Title: Analysis of the Efficient Market Hypothesis
Module Title: FOUNDATIONS OF FINANCIAL ANALYSIS AND INVESTMENT (MN7022)
Assignment Question: Critically review and discuss the concept of market efficiency and empirical approaches to test for it.
Words number: 2994
Analysis of the Efficient Market Hypothesis
INTRODUCTION
The study of “efficient market hypothesis” is originate from Louis Bachelier (1900), he studied the “Brownian motion” and the randomness of the stock price change from the perspective of random process and he found that discounted value reflected in market prices that no matter in the past, present or in the future (Lim & Brooks, 2009). With the use of computer, Kendall (1953) finds that the randomness of stock price changes by the commodity prices and stock prices in Britain and the United States (Lim & Brooks, 2009). Later, Robert (1959) proves that there is no difference between a sequence from the random sequence and the share price of the United States (Lim & Brooks, 2009). In 1964, Osborne puts forward the “random walk theory”, he believes that the change of stock price is similar to the molecular chemistry “Brownian motion” which means that the movement of the particles that suspended in a liquid or gas is continual and chaotic, and that means the change of stock price is unpredictable (Lim & Brooks, 2009). In 1970, Eugene Fama thinks that there is no “memory” of yield sequence of the stock price in statistics and inventors cannot predict its future direction based on the historical prices then Fama presents the efficient market hypothesis in 1970 (Lim & Brooks, 2009). The definition of the efficient market is that if the prices fully reflect all available information in a securities market that is called the economic market (Dimson & Mussavian, 1998). Refers to the efficient market hypothesis theory, the security price can reflect all relevant security information sensitively,
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