The Efficient Market Hypothesis ( Emh ) Essay

1031 Words Dec 2nd, 2015 5 Pages
The efficient market hypothesis(EMH) was originally considered by an American economist Eugene Fama in 1965. Around 1970s, the EMH had achieved its dominance among economic theories and had became the base of outstanding financial models and assumptions. (Shiller, 2003) In the financial field, CAPM (Capital Asset Pricing Model) was propounded by Robert Merton in 1973. As for the economic area, Robert Lucas had published “Assets Prices in an Exchange Economy” in 1978. It can be seen that this prominent conception had successfully linked finance with economy in one specific theory. This essay will explain the general definition and features of efficient markets and go on illustrate three various versions of efficient market hypothesis. Furthermore, how corporate managers measure the market value by taking advantage of the size effect, the value effect and the momentum effect and how managers make decisions based on EMH. At the end of the essay, a dilemma – market inefficiency, which is the reality of efficient markets that investors may face will be shown.

The efficient market indicates that investors are able to speculate historical, public or private information as the stock prices reflected. (Levy & Post, 2004) In other words, information is a core factor of an efficient market because it indirectly affects the analysis of the stock prices. For instance, the weather forecast predicts a hard freeze this year and this information will be devastating to Tropicana Company as…

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