An Overview of Efficient Market Hypothesis

Paper Summary:

This paper gives a thorough overview of the economic theory of Efficient Markets which states that prices of stocks and other securities fully reflect the information available to the investors in the market. The paper investigates why some finance professionals harshly oppose this system as it neglects the authenticity of fundamental or technical analysis. It shows that these professionals claim that if the assumptions of the theory were true, if investors traded their stocks in an efficient market, where prices are a reflection of available information, the buying and selling of securities would no more be considered as a business and it would become a matter of fortune to benefit from a sale or purchase of securities. The paper uses several stock market anomalies to show how the Efficient Market Hypothesis works.

From the Paper:

"From the above discussed stock market anomalies, it is evident that the future trends of securities and stocks are predictable to some extent. In some circumstances, the predictability of security prices is inconsistent with efficient market hypothesis. In addition to the above-mentioned anomalies, researchers have also pointed out some other inconsistencies in the capital markets, which bring the authenticity of EMH to doubt. For instance, researchers have found evidences of rise or fall in capital markets in certain specific periods, leading to the conclusion that the capital markets are subject to certain periodic or seasonal effects. Moreover, several studies have also revealed that the price to earning ratios of the firms has a very strong capability to predict future fall or rise in prices (Campbell and Sheller, 1988)."

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