The Informational Efficiency of the Stock Market Essay

The Informational Efficiency of the Stock Market Essay

Length: 1636 words (4.7 double-spaced pages)

Rating: Powerful Essays

Open Document

Essay Preview

Since the existence of stock markets, people tried to formulate models that reflect and deal as a guideline to understand how markets function. The concept of market efficiency is a major and broadly accepted hypothesis that mainly developed since the formulation of the market efficiency hypothesis by Eugene Fama, in 1970.

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

2.1 Th...


... middle of paper ...


...hodological Suggestions”, Journal of Finance, 44, pp. 1-10.

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
a Random Chain”, Econometrica, 28, pp. 916-918.

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

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Stock Market: efficient allocator of resources? Essay

- In answering the question on discussion whether it is important for stock markets to be efficient in order to fulfil its roles, it is important to discuss the roles and the functions of the stock market and why it is important for the stock market to be efficient in order to be able to operate and to perform its role as an efficient allocator of resources.. Secondly it is essential to look at the concept of capital market efficiency and what it means. Clearly, market efficiency is a concept that is controversial and attracts strong views, partly because of the differences in the way individuals explains the concept, and partly because it is believed that it determines how an investor will ap...   [tags: Economics]

Powerful Essays
1562 words (4.5 pages)

Essay about Stock Asset Returns Are Predictable Part 1

- 4. THEORITICAL BACKGROUND Since the originative works of Fama (1965 and 1970), where an efficient market from the informational execution point of view was defined as one where “stock prices ‘fully reflect’ all available information” (Fama 1970) and market efficiency was categorized into three levels: weak-form, semi-strong form and strong-form. First of all, the information set through weak form efficiency, reflects only the historical prices or returns. Second of all, the information set in semi-strong form efficiency, contains information available to all market participants....   [tags: finance, classifications, efficiency]

Powerful Essays
1969 words (5.6 pages)

The Value Of A Firm Keeps Changing Due Essay

- The value of a firm keeps changing due to changes in economic activities. In academic literature, these economic activities are precisely termed as ‘corporate event’. Corporate actions/events and changes in corporate payout policies are important considerations for the finance managers while taking financial decisions. In particular, corporate actions such as cash dividend announcements have information content and are used by managers to signal the future prospects of the firm. They reduce information asymmetry between the mangers and shareholders through the private information reflected in the stock prices....   [tags: Stock, Finance, Stock market, Dividend]

Powerful Essays
769 words (2.2 pages)

Analysis of Capital Market Efificiency and the Efficient Market Hypothesis

- Capital market efficiency is concerned with assessing the movements of security prices over different time horizons. In this paper, I will briefly discuss capital market efficiency and then finish with an extensive discussion of the Efficient Market Hypothesis (EMH), which is a leading theory in explaining some of the major reasons for fluctuations in security prices. From this perspective, we will examine the three forms of efficiency, supporting and opposing arguments of the EMH, alternative theories, and potential modifications to the model....   [tags: Information Continuum, Liquidity Position]

Powerful Essays
2757 words (7.9 pages)

Controversial Activity about Short selling been Ethical Essays

- Short selling in the stock markets is the sale of stocks not owned by the seller. Money is made when the stock drops in value instead of increasing in value, thus making it such a controversial activity. Many have argued that short selling have large detrimental effects to the stock market, however it does also provide benefits to the society. By applying ethical models of reasoning and determining if NRFs are acting in the conflict of interest, we will be able to determine if short selling conducted by NRFs is indeed ethical and whether it should be allowed to be conducted....   [tags: stock market,NRF,consequentialism]

Powerful Essays
1580 words (4.5 pages)

Efficient Market Hypothesis Essay

- The company Dimensional Fund Advisors works at the biggest US stock market. According to philosophy of Dimensional “It is certainly possible to outperform markets, but not without accepting increased risk.” (Markets Work, Dfaus.). Does this market agree to the Efficient Market Hypothesis clearly ending market attempts according to the weak, the semi-strong, and the strong forms of efficiency. Situation at the US market. In fact, the Dimensional Fund Advisors work at the technically and managing advanced US market....   [tags: Dimensional Fund Advisors, Economy]

Free Essays
496 words (1.4 pages)

Japan 's Stock Market Analysis Essay

- Japan has one the most advanced economies in the world, with an advanced economy comes an advanced equity market. As other advanced equity markets are, the Japanese market is similar to the U.S. in its essential functions and its operation by the exchanges that allow its existence. The Japanese stock market is third largest in the world by market capitalization, surpassed only by the United States and China. Market participants trade over the Tokyo Stock Exchange and the Osaka Securities Exchange which combined to form the Japan Exchange Group (JPX) in 2013 (JPX.com)....   [tags: Stock market, Stock exchange]

Powerful Essays
1295 words (3.7 pages)

The Stock Market And Stock Exchange Essay

- This paper will encompass the importance of the U.S stock market/stock exchange versus the Chinese stock market/ stock exchange, with a brief introduction about how each stock market/stock exchange came into existence, the importance of each stock market/stock exchange, how the U.S and Chinese manage their stock markets/stock exchange, how corporations are appointed plus the rules and regulations. This will also entail random facts about each stock market/stock exchange. Stock markets are like hitting a royal flush, if the price of your stocks goes up, you win; if it drops, you lose....   [tags: Stock market, Stock exchange, Stock]

Powerful Essays
2138 words (6.1 pages)

Financial Investment At The Stock Market Essay

- QUESTION 1 (i) Security markets refer to any type of financial investment at the stock market. A security market encompasses; equity markets, bond markets, and derivatives markets. Only a few companies in East Africa are enlisted at the stock exchange due to the technicalities of listing companies and the disadvantages that comes with it. Enlisting a company at the securities exchange market has advantage and disadvantages. The following are some of the advantages and disadvantages of enlisting a company at the securities exchange market; Advantages of Enlisting a Company at the Securities Exchange Market (a) Free Coverage and Publicity; Enlisting a company at the securities exchange market...   [tags: Stock market, Stock exchange]

Powerful Essays
1382 words (3.9 pages)

Why Is The Stock Market? Essay

- “When you’re young, saving for something that’s years away—aka retirement—may not seem important. But it is exactly when you should start saving. The more time your money is invested, the more time it has to grow.” (Fidelity) Stocks are a great and somewhat easy way to have the money that is invested in them exponentially grow overtime. It’s a great way to start saving for future plans like a family and retirement, and can become more and more beneficial throughout the years. Even investing small amounts of money into the market can lead to larger profit in the future....   [tags: Stock market, Stock, Preferred stock, Security]

Powerful Essays
1581 words (4.5 pages)