Critical Analysis of Efficiency Market Hypothesis
ABSTRACT
Michael Jensen writes, “There is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis.”
The term ‘Efficient Market Hypothesis’ (EMH) is concerned with the behavior of prices in asset markets. It was initially applied to the stock market, but the concept was soon generalized to other asset markets. EMH has also been a subject of debate since its inception in the 1960s.
INTRODUCTION
This essay critically discusses’ A market is efficient with respect to a particular set of information if it is impossible to make abnormal profits by using this set of information to formulate buying and selling decisions.’(With respect to Technical & Fundamental Analysis).
In this essay, firstly, the Efficient Market Hypothesis (EMH) is given an appraisal in relation to random walk, as well as its definition, revealing theories in context of empirical evidence. A brief explanation of the 3 forms of EMH is highlighted alongside a brief description of its tests for validity. The main focus of discussion is whether or not Technical & Fundamental Analysis can determine abnormal returns by investors strategically using a set of information to formulate buying and selling decisions to beat the efficient market. (Graphs and sets of equations may be applied). Following general empirical studies, the theory of Efficient Market typically asserts that, it would be impossible to consistently outperform the market by means of technical & fundamental analysis, consequently, in the light of this assertion, technical, fundamental and other anomalies are revealed that may suggest some levels of market inefficiencies. Finally, a conclusion, subjectively underlining the relevant points expressed above, putting to perspective facts conveyed through the
Michael Jensen writes, “There is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis.”
The term ‘Efficient Market Hypothesis’ (EMH) is concerned with the behavior of prices in asset markets. It was initially applied to the stock market, but the concept was soon generalized to other asset markets. EMH has also been a subject of debate since its inception in the 1960s.
INTRODUCTION
This essay critically discusses’ A market is efficient with respect to a particular set of information if it is impossible to make abnormal profits by using this set of information to formulate buying and selling decisions.’(With respect to Technical & Fundamental Analysis).
In this essay, firstly, the Efficient Market Hypothesis (EMH) is given an appraisal in relation to random walk, as well as its definition, revealing theories in context of empirical evidence. A brief explanation of the 3 forms of EMH is highlighted alongside a brief description of its tests for validity. The main focus of discussion is whether or not Technical & Fundamental Analysis can determine abnormal returns by investors strategically using a set of information to formulate buying and selling decisions to beat the efficient market. (Graphs and sets of equations may be applied). Following general empirical studies, the theory of Efficient Market typically asserts that, it would be impossible to consistently outperform the market by means of technical & fundamental analysis, consequently, in the light of this assertion, technical, fundamental and other anomalies are revealed that may suggest some levels of market inefficiencies. Finally, a conclusion, subjectively underlining the relevant points expressed above, putting to perspective facts conveyed through the
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