The efficient market hypothesis (EMH) is widely used to analyse the financial market and security prices. The EMH is efficient if public information is totally reflected by asset prices (Malkiel, 2003, p.59). Malkiel (2003, p.59) implies that information of stock market was exactly shown by security market. In the last ten years, the EMH had significant effect on the financial market. This essay aims to show the three main types of the EMH and analyses if the EMH works in the real market economy. This essay will explain the meaning of three efficient market forms. It will then analyse the implication of the EMH. Finally, it will discuss the challenges of the EMH.
The efficient capital market is the market which totally shows the truth factors …show more content…
The first one is about accounting choice. Hillier et al. (2012, p.371) imply that each company wants to have a high trade price instead of a low trade price. The EMH delivers the correct market information to investors. In efficient market, accountants can make accounting choices accurately. Besides, EMH make the timing decision more correctly. If the market is efficient market, managers can predict trend of stock market and then catch suitable opportunity to decide what they should do (Hillier et al., 2012, p.372). This means that right market timing could be chosen by investors. Another advantage is that investors do not need to waste time to decide which is better to choose. Hillier et al. (2012, p.374) stress that people should not try to predict the changeable interest rates and foreign currency, because it is impossible to immediately make a choice. If they catch the opportunity and do some valuable actions, it is more useful for them to increase return. Finally, if the market is effective, all of the goals can be achieved. The strong form efficient market reflects both public and private information including information in market prices (Brealey et al., 2013, p.325). If the information is effective used by managers when making decisions, they may get more useful messages to strengthen the administration of an enterprise. The evidence seems to be strong that the EMH is useful for manager to manage …show more content…
In some situations, it does not make sense. Firstly, people are not always rational. Many investors do not pay attention to diverse ways of investment, some of them are not always stay in the same level, and some of them sell the good stocks but hold bad stocks. This may make them have more tax to pay (Hillier et al., 2012, p.364). In the efficient market hypothesis, investor could recognise the change of information quickly, but in real life, that may be not true. The opposite is the case. After getting new information, people usually observe change of the security prices, then take measures. Investors prefer to believe the old information rather than recognise the new information (Hillier et al., 2012, p.364). The EMH thinks investor can know about information immediately and correctly, but every investor have their own opinions, maybe they are influenced by their own views and make the incorrect
The efficient capital market is the market which totally shows the truth factors …show more content…
The first one is about accounting choice. Hillier et al. (2012, p.371) imply that each company wants to have a high trade price instead of a low trade price. The EMH delivers the correct market information to investors. In efficient market, accountants can make accounting choices accurately. Besides, EMH make the timing decision more correctly. If the market is efficient market, managers can predict trend of stock market and then catch suitable opportunity to decide what they should do (Hillier et al., 2012, p.372). This means that right market timing could be chosen by investors. Another advantage is that investors do not need to waste time to decide which is better to choose. Hillier et al. (2012, p.374) stress that people should not try to predict the changeable interest rates and foreign currency, because it is impossible to immediately make a choice. If they catch the opportunity and do some valuable actions, it is more useful for them to increase return. Finally, if the market is effective, all of the goals can be achieved. The strong form efficient market reflects both public and private information including information in market prices (Brealey et al., 2013, p.325). If the information is effective used by managers when making decisions, they may get more useful messages to strengthen the administration of an enterprise. The evidence seems to be strong that the EMH is useful for manager to manage …show more content…
In some situations, it does not make sense. Firstly, people are not always rational. Many investors do not pay attention to diverse ways of investment, some of them are not always stay in the same level, and some of them sell the good stocks but hold bad stocks. This may make them have more tax to pay (Hillier et al., 2012, p.364). In the efficient market hypothesis, investor could recognise the change of information quickly, but in real life, that may be not true. The opposite is the case. After getting new information, people usually observe change of the security prices, then take measures. Investors prefer to believe the old information rather than recognise the new information (Hillier et al., 2012, p.364). The EMH thinks investor can know about information immediately and correctly, but every investor have their own opinions, maybe they are influenced by their own views and make the incorrect