Advanced Global Financial Management.

Running head: REPORT 0
ADVANCED GLOBAL FINANCIAL MANAGEMENT
JANUARY 10, 2020
STUDENT DETAILS:

REPORT 1
Contents
Introduction –..............................................................................................................................................2
Literature review -.......................................................................................................................................3
Application by Corporate Managers-...........................................................................................................6
Conclusion...................................................................................................................................................8
References.................................................................................................................................................10

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Introduction –
The Efficient Market Hypothesis is known as investment theory. In this theory, prices of
shares reflect the available information. The EMH is considered as the hypothesis in financial
economic, which represents that asset prices reflect all the existing data. The direct implication
of EMH is that this is not possible to "beat marketplace" constantly based on risk adjustment
since the price of market must only make reaction on new data. The procedural or fundamental
evaluation cannot make risk adjusted excess return or alpha consistently. Only insider data can
be resulted into oversized risk adjusted return. According to theory of EMH, the stock is traded
at fair value on stock’s exchange. It makes impracticable for investor to either purchase
undervalued stock or sell stocks at overstated prices.
There are three stages of EMH. The three levels of efficient market hypothesis are semi-
strong form efficiency, strong efficiency, as well as weak efficiency. It is assumed by the weak
efficiency that current price of stock reflects all presented data. This previous price’s
performance has no relation with the forthcoming. In different terms, it is stated by hypothesis
that it is impossible to conduct technical evaluation to get exceptional return. Supporters of weak
efficiency theory suppose that if fundamental evaluation is utilised, then the overvalued stocks as
well as undervalued stocks can be determined. In this way, the investor can evaluate the financial
statement of company to enhance the possibilities of making higher profit more than market
average profit. Additionally, the strong efficiency of the efficient market hypothesis explains that
private along communal data is incorporated in current prices of stock. It can say that strong
efficiency form of EMH essentially presumes the perfect marketplace. In this way, it can be
reasonable in case of the insider trading dealings. The supporters of this level of the EMH theory
state that the investors cannot make return on investment that exceed normal return of

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marketplace, regardless of the data retrieved or research made. In addition, it is stated by semi-
strong efficiency that price of stocks has factored in all current public data. As per the semi-
strong efficiency, this is not possible to utilise fundamental evaluation to select stock that would
beat the return of market. In the following parts, meaning of Efficient Market Hypothesis,
reasons of providing or not providing proper description of asset pricing in relation to debt and
equity is discussed and examined. This report also discusses the features of EMH.
(Urquhart & McGroarty, 2016)
Literature review -
The financial econometric volatility is greatly silent on a connection between asset return
volatility as well as the fundamental underlying factors. In its place, one typically proceed is
decreased form the projecting volatility but not projecting the effect of essential macroeconomic
development specifically, the connection between fundamental volatility and asset market
volatility remain greatly unstudied. The financial market including stock market attracts the

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investor (Korajczyk, 2017). It is required by the investor to forecast the marketplace to earn
additional return on the investment (Hamid, et. al, 2017). In opposition, it is also required by the
academicians to forecast market for evaluating the efficiency of the projecting models. In reality,
the financial marketplaces put the great challenge before the researcher who interested in
establishing the projecting methods. Various financial economists along with researchers from
different streams such as mathematics, medical science, physics, and social science have made
attempt to create predictive projects for the stock price. However, it is found that these attempts
did not get success (Cornell, 2018). The main question is that why are the price of financial asset
changeable? The efficient market hypothesis render best solution of this problem. It is evident
that the financial markets have straight impact of the money and data there in. The price of
financial asset at one period states the anticipations of investor that are created significantly by
the available data. It can say that accuracy as well as rapidity in which marketplace translated the
expectations into costs are considered as the market efficiency (Bariviera, et. al, 2017).
Efficient market hypothesis is helpful in managing informational efficiency. It is mainly
depended on a notion that the stock market return or price is changeable (Atanasov, Pirinsky &
Wang, 2018). The stock market does not adopt regular patterns. In this way, this is not possible
to “beat marketplace.” According to efficient market hypothesis theory, security price directly
reflects all available appropriate data significantly. It is suggested by the efficient market
hypothesis theory that price of assets is determined by supply as well as demand in competitive
marketplace with sensible investor (Suliman, 2017). The skilled and sensible investor can be able
to collect data quickly. Additionally, he or she can incorporate the data into the prices related to
stock. Only new data such as news, cause changes in price. However, it can say that the news, by
its meaning, is changeable. In this way, it is clear that stock market that is directly affected by the

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news is changeable (Fiévet & Sornette, 2016). As per the efficient market hypothesis theory
(EMH theory) neither technical evaluation (assessment of previous stock price in an attempt to
forecast upcoming price) nor fundamental evaluation (financial evaluation like industry
evaluation, corporation assessment as well as valuation of assets) may be useful for an investor
to select “under-valued stock”. The previous prices do not have significant data. These prices are
not useful to forecast the upcoming changes (Ying, et. al, 2019). In addition, the price of today is
completely independent from the previous prices so this is not worthy to assess previous return
and based on result attempt or supposed to generate profits from the marketplace (Malkiel,
2004).
In addition, Fama (1965) mentioned that EMH is related to concept affecting random
walk method. Malkiel (2003) also stated that the main problem in relation to the information
related to pricing, as considered in several occasions during the latest self-governing and
economic debt crises, is nobody can forecast the impacts of data particularly under the insecurity.
Henceforth, according to opinion of Fama (1991) it is not possible to assess the equilibrium price
at the time of uncertainty. In addition, the rapid adjustment property of the EMH can cause
successive independent change in price that imply price according to random walk method. It is
stated by Malkiel (2003) that the assumption behind random walk method is that when
information’s flow is unhindered along with presented in stock price; in that case the prices of
tomorrow change would state just news of tomorrow. This would be independent of the price
alterations today. In this way, this is motive for which efficient market hypothesis does not
render proper explanation of assets pricing in relation to the debt along with equity of
organisation (Rossi & Gunardi, 2018).

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Application by Corporate Managers-.
The Efficient Market Hypothesis continuously renders the substantial description of how
prices of assets are essential to respond to different types of data. However, it does not render the
very good account of the pricing of the equity as well as debt of company. Henceforth, the EMH
has no or less relevance to the corporate managers. It can say that when the market was properly
efficient to render no advantageous chances to data trader, then this is required to be anticpated
that the corporate manager will not be present. Moreover, there is great importance of the EMH.
The important rise in the acceptance of index funds, which trace market index both mutual
funds and ETF, is due at least in part to prevalent acceptance of the EMH (Sen, Singh &
Mazumder, 2017). The investor who subscribes to efficient market hypothesis is more inclined to
make investment in the passive index funding, which are made to mirror the whole performance
of market. On the other hand, they are less inclined to desire to make payment of high fee for
expert capital management when they do not expect even the best of fund manager to
importantly overtake average marketplace return. Conversely, because research in support of the
EMH has stated how rare capital managers who can consistently outperform the market; then the
certain people who have established this skill are ever more required in future (Jensen, 1969).
The exposed manager takes more systematic risk (risk assessed by marketplace beta). Even
though, the managers charge low fee. In addition, the manager generates same raw as well as
benchmark adjusted return as the peer. The disclosure to concepts of efficient market hypothesis
is helpful to generate large capital flow (Malkiel, 2003).

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(Mittal & Thakral, 2018)
The efficient market hypothesis is the investment performance. It makes focus on the
prediction regarding behaviour of investment. Efficient market hypothesis certainly led to an
understanding that risk is very significant element in the capital marketplace equilibrium. The
performances of actively managed mutual fund have been carefully remarked and assessed by
planning sponsor, information provider, as well as investor (Firoj & Khanom, 2018). It is
evident that a notion of efficiency hypothesis is so significant for investor because it permits the
investor to make rational choice. The only actual manner that the investor mat get above average
profit throughout the investment in various marketplaces is by making advantages of the
abnormalities while they take place. It is stated by EMH that an investor may not create excess
return out of old data, facts, as well as figures. This is easy to describe the old facts, figures, as
well as data. However, the calculation of an excess return is based on the correct evaluation of
the risks related to holding the shares. In spite of all functions conducted in the relevant field
since the 1960, there is still no single, commonly accepted or accurately verifiable evaluation of
the risks in a framework of asset holding (Scholes, 1972). Additionally, the followers of the

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theory of efficient market hypothesis can plead with certain justifications that pricing
irregularities can be more ostensible than actual, as they can be depended on the inexact measure
of risks. It can say that there are certain corporate managers who do not have faith in EMH for a
reason that the active traders are available in the market. If there is no any chance to get benefit
that beat marketplace, at that time there must be no incentives for becoming the active traders.
Therefore, the fee levied by active manager is evidence that theory of efficient market hypothesis
is not accurate. A main reason of this belief is that it specifies that the efficient marketplace have
lower transactional cost.
(Yao & Rahaman, 2018)
Conclusion
As per the above analysis, it can be concluded that the efficient market hypothesis is
greatly accepted as valid. However, the evidence against the marketplace efficiency is mounting.

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To some this evidence is worrying and they raise issues on the sampling mistakes, the formative
scope of behavioural theories along with different econometric concern. The efficient market
hypothesis is considered as controversial theory that explains that price related to security
reflects all current data. It also makes them fruitless to prefer stock. It is found that efficient
market hypothesis reflects that stock cannot be sold very expensively or cheaply. Therefore, it
will be unusable to take decision related to purchasing and selling. As per the efficient market
hypothesis, a motive for this perfect pricing is that, if one stock takes place to be trading even
inexpensively (or very expensively), then the requirement enhances (or reduces), rapidly moving
the prices to the most appropriate value.

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References
Atanasov, V., Pirinsky, C., & Wang, Q. (2018). Did the Efficient Market Hypothesis Affect
Investment Practice? Evidence from Mutual Funds.
Atanasov, V., Pirinsky, C., & Wang, Q. (2018). The Efficient Market Hypothesis and Investor
Behavior.
Bariviera, A. F., Basgall, M. J., Hasperué, W., & Naiouf, M. (2017). Some stylized facts of the
Bitcoin market. Physica A: Statistical Mechanics and its Applications, 484, 82-90.
Cornell, B. (2018). What Is the Alternative Hypothesis to Market Efficiency?. Available at SSRN
3167593.
Fama (1965) The behaviour of stock market prices, Journal of business, 2, p. 34-105
Fama (1991) Efficient market II, Journal of finance, 49, 3, pp. 1575-1667
Fiévet, L., & Sornette, D. (2016). The Weak Efficient Market Hypothesis in Light of Statistical
Learning. arXiv preprint arXiv:1610.03724.
Firoj, M., & Khanom, S. (2018). Efficient Market Hypothesis: Foreign Exchange Market of
Bangladesh. International Journal of Economics and Financial Issues, 8(6), 99-103.
Hamid, K., Suleman, M. T., Ali Shah, S. Z., Akash, I., & Shahid, R. (2017). Testing the weak
form of efficient market hypothesis: Empirical evidence from Asia-Pacific
markets. Available at SSRN 2912908

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Jensen, M. (1969) Risk, the pricing of capital assets and evaluation of investment portfolio,
Journal of business, 42, pp. 167-247
Korajczyk, R. (2017). How should I invest? What the Efficient Market Hypothesis does and does
not say.
Malkiel, B. (2003) The EMH and its critics, Journal of Economic perspective, 17,1, pp. 59-82
Malkiel, B. (2004) A random walk down Wall Street. USA: Norton
Mittal, S. K., & Thakral, M. (2018). Testing weak form of efficient market hypothesis: Empirical
evidence for bullions and base metal segment of Indian commodity market. Economic
Affairs, 63(2), 575-581.
Rossi, M., & Gunardi, A. (2018). Efficient market hypothesis and stock market anomalies:
Empirical evidence in four European countries. Journal of Applied Business
Research, 34(1), 183.
Scholes, M. (1972) The market of security substitution vs price pressure and effect of
information on share price, Journal of business, 45, pp. 195-212
Sen, S., Singh, B. M., & Mazumder, S. (2017). Efficient Market Hypothesis: A Study on Indian
Capital Market. Research Bulletin, 42(4), 69-79.
Suliman, O. (2017). Efficient market hypothesis. The American Middle Class: An Economic
Encyclopedia of Progress and Poverty [2 volumes], 70, 126.
Urquhart, A., & McGroarty, F. (2016). Are stock markets really efficient? Evidence of the
adaptive market hypothesis. International Review of Financial Analysis, 47, 39-49.

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Yao, H., & Rahaman, A. R. A. (2018). Efficient Market Hypothesis and the RMB-Dollar Rates:
A Nonlinear Modeling of the Exchange Rate. International Journal of Economics and
Finance, 10(2), 150-160.
Ying, Q., Yousaf, T., Akhtar, Y., & Rasheed, M. S. (2019). Stock Investment and Excess
Returns: A Critical Review in the Light of the Efficient Market Hypothesis. Journal of
Risk and Financial Management, 12(2), 97.