The efficient market hypothesis (EMH) is an important assumption in finance. What are the various forms of the EMH? Does the EMH in any of its forms make sense given the current economic circumstances?
Hariem Haladni
Hariem Haladni
September 2012
September 2012
In modern financial economics, one of the most essential constructions , which plays a significant role in financing strategy, is efficient market hypothesis (henceforth EMH). Despite the fact that its first theoretical formulation, which was founded by Paul Samuelson in 1960s, is almost five decades old, numerous academic studies have been conducted about it (Alajbeg, Bubas & Sonje, 2012). According to Alajbeg et al. (2012), in the middle of 1960s market efficiency was defined by Samuelson as the existence of a complete competition in a market, albeit under an assumption that all participants have equally the same opportunity to access the available information. Furthermore, Fama (1965) cited in Alajbeg et al. (2012) attempts to show the EMH empirically.
This essay will try to critically debate all the forms of efficiency and give sensible evidence why most of the forms seem to be illogical in the current economic situations. It will start by introducing how to recognise efficiency and what are the forms of the EMH, following by testing each form in today’s economic circumstances with presenting coherent arguments.
Damodaran (2001) points out that market efficiency is distinguished by three different measurements. First is considering the amount and the distance of diverting price from real value in the market. The second measure is by looking at the pace and the quantity of adapting prices to new information which come to the market. Finally, it is measured by determining the