Financial and Monetary Economics
‘‘Should we consider the Stock Market an efficient market.’’
In theory the Stock Market is said to be efficient as stock prices
should follow a random walk, which, means that stock price changes
should be random and unpredictable, If stock prices were predictable
then this would prove that the stock market is inefficient as this
implies that all available information was not already impounded in
stock prices. Hence the notion that stock prices reflect all available
information is known as the efficient market hypothesis (EMH). It was
Professor Eugene Fama who created the term EMH, in his paper
‘Efficient Capital Markets’ and claimed that in efficient markets
prices reflect all available information. There are three versions of
the EMH, and each of these versions has a different implication for
investment management.
The weak form of the EMT: Suggests that all past market prices and
data are fully reflected in asset prices. The implication of this is
that technical analysis cannot be used. Technical analysis is the
search for recurring and predictable patterns in stock prices, it also
assumes that stock prices responds slowly to demand and supply
factors, which, gives an opportunity for investors to make profit.
This analysis is against the EMH.
The semi – strong form of the EMH: Suggests that all publicly
available information is full reflected in asset prices. This implies
that neither technical analysis nor fundamental analysis can be used.
The EMH predicts that fundamental analysis would be useless because
there are many investment firms competing against each other, and it
is will b...
... middle of paper ...
...r the cliff. Similarly, if everyone believes the market
is efficient, then it will no longer be efficient since no one will
invest actively. In effect, efficient markets depend on investors
believing the market is inefficient and trying to beat it[9]”.
BIBLIOGRAPHY: -
1.) Z. Bodie, A. Kane and A Marcus, ‘Essentials of Investment’, McGraw
– Hill, 2003.
WEBSITES: -
1.) http://www.efficientfrontier.com
2.) http://www.bos.frb.org
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[1] web.mit.edu/krugman/www – Paul Krugman’s website www.ssrn.com
[2]
[3] The Stock Market Isn’t Perfect, Regent News, Published July 24,
2004 publication of the New Haven Register.
[4] Web Page
[5] Web page
[6]
[7] Z. Bodie, A. Kane, A. Marcus, ‘Essentials Of Incestment’, 2003