Essay on The Efficient Market Hypothesis

1822 Words Jan 30th, 2013 8 Pages
The efficient market hypothesis (EMH) is an important assumption in finance. What are the various forms of the EMH? Does the EMH in any of its forms make sense given the current economic circumstances?
The efficient market hypothesis (EMH) is an important assumption in finance. What are the various forms of the EMH? Does the EMH in any of its forms make sense given the current economic circumstances?

Hariem Haladni
Hariem Haladni

September 2012

September 2012

In modern financial economics, one of the most essential constructions , which plays a significant role in financing strategy, is efficient market hypothesis (henceforth EMH). Despite the fact that its first theoretical formulation, which was founded by Paul
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Then Brealey et al. (2011:352) demonstrate ‘‘since both companies participated in the same underlying cash flows in 2005, it would be expected the stock prices to have moved in exact lockstep, while the real price of the tow shares sometimes diverged substantially’’. Therefore, Hillier et al. (2010) confirm that the security choices based on patterns of historical price changes would not be as acceptable as random choice. As a consequence of this evidence, it can be assumed that the weak form efficiency seems to be a meaningful form in the new economic environment.
Secondly, in examining the semi-strong efficiency, the speed of reacting security prices towards announcements is measured (Brealey et al., 2011). According to this form of efficiency, previous price information would not have any influence on present actual return because this form implies that in an efficient market, historical information has merely reflected in the current prices (Hillier et al., 2010). Whereas, in many empirical cases past information impacts on stock prices. For example, Hillier et al. (2010) highlight the global credit crisis of 2008 which firstly started only from the British bank Northern Rock. Then it slowly continued and cover some other banks, such as, Bear Stearn, the US investment bank, HBOS and Lehmann Brothers. Hillier et al. (2010) also state that it had

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