Analysis of Efficient Market Hypothesis in Finance: MN1019 Essay

This essay provides an in-depth analysis of the Efficient Market Hypothesis (EMH), a fundamental concept in finance. It begins by defining market efficiency and its significance, particularly for investors and entrepreneurs. The essay then explores the three forms of EMH: weak, semi-strong, and stron...Read More

Running head: ESSAY 0
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MN1019 INTRODUCTION TO FINANCE
FEBRUARY 28, 2020
STUDENT DETAILS:

ESSAY 1
The market is considered to be efficient in relation to the data if prices ‘completely reflect’ all
the available information about securities (Atanasov, Pirinsky and Wang, 2018). Efficient
Market Hypothesis is most eminent and significant financial theory. The efficient capital
market is considered as the market in which price of securities adjusts quickly to the advent
of new information. It is suggested by Efficient Market Hypothesis that the prevailing prices
of securities should be unbiased reflection of recently available data. There are significant
numbers of reasons for which it is essential to learn about the efficient market hypothesis.
Firstly, the entrepreneurs are required to get knowledge whether the price of stocks in the
market completely presents value of entity. In addition, it is also beneficial to know about the
type of theories. However, there are different reasons to study the Efficient Market
Hypothesis as a result. The EMH theory has become the significant theory in financial
market. In the following parts, the Efficient Market Hypothesis theory is discussed and
examined. This essay also discusses different forms of EMH theor.
The market efficiency is a term used by economists. Certain meanings of explanation of what
this means can sound quite complex. However, it is not hard idea to grasp. It is evident that
the market efficiency is not only something, which is significant to the economists. However,
if the people invest money then it is also somewhat that may concern the people too
(Ausloos, Jovanovic and Schinckus, 2016). The Efficient Market Hypothesis (EMH) is one of
the fundamental reasons for which investor can select the passive investing method. Even
though, the fans of index funds cannot have knowledge about this (Kane, et. al, 2018). The
efficient market hypothesis is considered as the hypothesis in financial economics that
signifies that prices of assets reflect all current information (Jovanovic, Andreadakis and
Schinckus, 2016). The direct effect is that it is not possible to "beat marketplace" consistently
on a risk-adjusted basis since the prices of market are not required to perform new

ESSAY 2
information. The Efficient Market Hypothesis is helpful in explaining proper validation of
purchasing the exchange traded funds and passive mutual fund (Ying, et. al, 2019). The
Efficient Market Hypothesis (EMH) essentially says that all known data about investment
security, like stock, is already factored into the security’s prices. In Efficient Market
Hypothesis theory, it is not essential for the investor to be rational. It can see that the
individual investor would perform in random manner, but all together, the market is at all
times "correct." In different words, "efficient" indicates "normal." For an instance, the
unfamiliar reaction to uncommon data is normal. In a case when the crowd unexpectedly
starts running in one direction, this is normal to run in that way, even if there is not any
rational motive for conducting this.
Further, the efficient market hypothesis has three levels, such as weak EMH, semi-strong
EMH, as well as strong EMH. The weak EMH states that current stock price reflects all
current data. In this way, the previous price act has no relation with upcoming price. It can
say that the weak efficient market hypothesis states historical value, previous price as well as
trend that cannot forecast upcoming price. The weak efficiency is the facet of efficient market
hypothesis. In different terms, the weak efficiency hypothesis says that using technical
evaluation to get exceptional returns is not possible. Therefore, the weak efficient market
hypothesis is shot targeted unswervingly at technical evaluation. If past stock price does not
help to forecast price of future, there is no point in looking at them. The key principle of
weak form efficiency is that the randomness of stock prices makes it impossible to find price
patterns and take advantage of price movements. The weak form efficiency does not
consider technical analysis accurate. According to weak form efficiency, it is therefore
extremely difficult to outperform the market, especially in the short term (Rossi and Gunardi,
2018)

ESSAY 3
Furthermore, the semi-strong form efficiency is another level of efficient market
hypothesis (EMH). It holds the prices of security that adjust quickly to the newly available
information. Therefore, it eliminates the use of fundamental or technical analysis to achieve
higher return. It can say that the semi-strong efficiency is a financial situation in which
market adjusts the investment’s prices almost immediately as data is available. This type of
EMH says that stock prices have factored in all the accessible current public data (Batista,
Maia and Romero, 2018). For this reason, it is not possible to utilise fundamental analysis to
select stock that would beat the return of market. It can see that the semi-strong efficiency
lies between strong market efficiency as well as weak market efficiency. The semi-strong
efficiency includes the weak form. In this way, when the market is semi-strong form
efficient, then this would be also weak form efficient. While the market is semi-strong
efficient, neither technical analysis based on previous method of return, nor fundamental
analysis based on current data, can be helpful in predicting movement of future price. On the
other hand, the non-public data can be utilised to get average return. Semi-strong form of
efficiency is typically tested by studying how prices and volumes respond to specific events.
If price reflect new information quickly, then markets are semi-strong form efficient.
Additionally, the semi-strong market efficiency presents in the market where security prices
already reproduce the public data and it is impossible to get excess return. This type of
efficient market hypothesis has also overly involved in proper manner. This form of market
efficiency does not seem to be ironclad. However, there have been a small handful of
investors (like, Warren Buffet and Peter Lynch) whose outperformance is of the proper level
(Bahmani-Oskooee, et. al, 2016).
Finally, the strong form of EMH says that the public information as well as private
information is incorporated into the prices of current stock. The strong form of efficient
market hypothesis assumes the perfect market. Additionally, it is not plausible when there are

ESSAY 4
insider-trading limitations. It is also stated by the strong form efficiency that current stock
prices state private information along with public information. It contends that non-market
and inside information as well as market information are factored in security prices and that
no one has monopolistic access to related data. It assumes a perfect market. It also concludes
that the excess return is not possible to get constantly. Additionally, ng form of EMH says
that everything that is knowable even the unpublished information, has already been stated in
the current price. The insinuation will be that even if the person has some insider data and can
legally trade based upon this, he or she will get nothing by conducting this. In this way, the
strong form efficient market hypothesis is not terribly relevant to most individual investors,
as this is not too often that the people have data not available to the organisational investors
(Al-Khazali and Mirzaei, 2017).
As per the above analysis, it can be concluded that the efficient market hypothesis is
considered as hypothesis in the financial economic that represents that the prices of assets
reflect current information. The direct implication is that this is not possible to "beat
marketplace" constantly on the risk-adjusted basis since the price of securities should only
give reaction to the new information. It is found that the primary assumptions of the efficient
market hypothesis are that data is globally shared and the price of stock follows the random
walk. In this way, they are determined by the current news in place of past trends. Therefore,
the idea of market efficiency is significant for investor. The reason is that it allows making
sensible selections. The only real way that they can get above average profit by the
investments in the different marketplaces, is by taking advantages of abnormalities when they
occur. When the market is running efficiently, then this would be impossible for the investor
to make more than average profit. However, the abnormalities can be subjugated. These over
time abnormalities tend to be ended. However, while they are there, then it is best time to
make advantages of them. The best thing for the investor is that there are various economists

ESSAY 5
who argue that there would not be full market efficiency. Henceforth, there will always be a
manner to attain an edge.

ESSAY 6
References
Al-Khazali, O. and Mirzaei, A., (2017) Stock market anomalies, market efficiency and the
adaptive market hypothesis: Evidence from Islamic stock indices. Journal of International
Financial Markets, Institutions and Money, 51, pp.190-208.
Atanasov, V., Pirinsky, C. and Wang, Q (2018) The Efficient Market Hypothesis and
Investor Behavior.
Ausloos, M., Jovanovic, F. and Schinckus, C., (2016) On the “usual” misunderstandings
between econophysics and finance: Some clarifications on modelling approaches and
efficient market hypothesis. International review of financial analysis, 47, pp.7-14.
Bahmani-Oskooee, M., Chang, T., Chen, T.H. and Tzeng, H.W. (2016) Revisiting the
efficient market hypothesis in transition countries using quantile unit root test. Economics
Bulletin, 36(4), pp.2171-2182.
Batista, A.R.D.A., Maia, U. and Romero, A., (2018) Stock market under the 2016 Brazilian
presidential impeachment: a test in the semi-strong form of the efficient market
hypothesis. Revista Contabilidade & Finanças, 29(78), pp.405-417.
Jovanovic, F., Andreadakis, S. and Schinckus, C., (2016) Efficient market hypothesis and
fraud on the market theory a new perspective for class actions. Research in International
Business and Finance, 38, pp.177-190.
Kane, J., (2018) A quantitative assessment of the Actively vs Passively managed debate,
framed within the context of the Efficient Market Hypothesis (Doctoral dissertation, Dublin,
National College of Ireland).

ESSAY 7
Rossi, M. and Gunardi, A., (2018) Efficient market hypothesis and stock market anomalies:
Empirical evidence in four European countries. Journal of Applied Business Research
(JABR), 34(1), pp.183-192
Sánchez-Granero, M.A., Balladares, K.A., Ramos-Requena, J.P. and Trinidad-Segovia, J.E.,
(2020) Testing the efficient market hypothesis in Latin American stock markets. Physica A:
Statistical Mechanics and its Applications, 540, p.123082.
Ying, Q., Yousaf, T., Akhtar, Y. and 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), p.97.