Although the term market efficiency to economists is also a broadly known term referring to operational efficiency, this paper concentrates on the efficiency of stock markets or to be more precise the informational efficiency of the stock market. Fama stated that in an efficient market the prices of stocks reflect all available information at any given time. His conclusion due to that fact is that it is not possible to outperform the market by selection.
Since this theory was formulated it was continuously challenged towards the reality through event studies that examined its applicability to the stock market. In this paper, the development and nature of the EMH will be discussed focusing on publications that examined the market to test for the three levels on market efficiency.
In the last section of the paper, the EMH will be challenged to observations of effects that the EMH can not explain. For example, the discovery of seasonalities that show us that there are timeframes in which the market performes better than in others. Among that other anomalies of the stock market are reviewed and their applicability to the thesis of the market efficiency hypothesis will be examined.
The last section of the paper deals with the blind spots the EMH and tries to give answers where the shortcomings of the model can be discovered in analysing the human behaviour.
2 The efficient market hypothesis
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Samuelson, Paul (1965). "Proof That Properly Anticipated Prices Fluctuate Randomly". Industrial Management Review, 6, 41–49.
Shiller, Robert J. (2003). “From Efficient Markets Theory to Behavioural Finance”, Journal of Economic Perspectives, pp. 100-103
Volcker, Paul (2011). "Financial Reform: Unfinished Business”, New York Review of Books, Retrieved December 28, 2013 from http://www.nybooks.com/articles/archives/2011/nov/24/financial-reform-unfinished-business/
Working, Holbrook (1960). “Note on the Correlation of First Differences of Averages in
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Quiggin, John (2013). "The Bitcoin Bubble and a Bad Hypothesis", The National Interest, Retrieved December 27, 2013 from http://nationalinterest.org/commentary/the-bitcoin-bubble-bad-hypothesis-8353
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