Efficient Market Hypothesis Implications of Essay

  • Length: 8 pages
  • Sources: 20
  • Subject: Economics
  • Type: Essay
  • Paper: #22478204

Excerpt from Essay :

This is because, the efficiencies in the market are: providing no kind of leverage to these individuals. At which point, any kind of advantage that they may have would be eliminated. This is important, because it provides good insights, as to how efficient the markets really are. As a result, this is what will reduce the underlying returns every single year. The author is an economist with Oxford University. (Burton 2005)

The article that was written by Chen (2005), discusses how the EMH theory can be able to provide the most relevant information surrounding stocks. Yet, when this was compared against computer-based programs, they were able to identify changes in prices at least 50% of the time. This is important, because it is showing how the changes in the expectations for stocks, can be more accurate when using various programs. Once this takes place, it meant that traders and investors can receive greater returns. The author is a researchers and scholar at the Institute for Economics in Taiwan. (Chen 2005)

The article that was written by Brenner (1979), tests how the EMH is performing in comparison with the CAPM model. The results were that the CAPM can be able to identify changes in the markets first. as, it can spot, shifts in the long-term trends; which is having a positive impact upon the overall returns. This is important, because it is showing how the EMH is not accurate at identifying changes in the underlying asset class. The author is a professor of economics at the University of Jerusalem. (Brenner 1979)

The second article that was written by Brenner (1977), talks about how the EMH is unhelpful in identifying changes in the trends of the markets. The reason why is because, these kinds of assumptions are based off of weak tests. This is when generalizations that are taken into account, to prove or disprove a theory. In the case of the EMH, they are using weak tests, which are highlighting how they cannot support the different shifts that will take place in the markets. This is important, because this information is helpful in illustrating the overall weaknesses associated with the EMH. The author is a professor of economics at the University of Jerusalem. (Brenner 1979)

In the article that was written by Stan (1977), it discusses how the markets and regulators will often overlook the impact of the EMH. The reason why, is because this theory is often based upon most people assuming that it is accurate. As a result, they believe that they can be able to use this without any problems. However, because it has trouble identifying new shifts in the market, means that investors will often post larger than expected losses. As a result, the author believes that regulators need to examine the activities of this theory on: the markets and individual portfolios. This is important, because it show the biggest flaw with the EMH is: the inability to identify new trends early. The author is researchers and professors at the University of Southern California. (Stan 1979)

The article that was written by Findlay (2002), talks about how the EMH has been discredited in many circles. Yet, there is no research to show how: the theory has performed historically or the way it can be used in conjunction with other tools. This is important, because it is showing how many of the negatives associated with the EMH have been used to criticize it. Yet, it has not been used in conjunction with a host of other ideas. The author is partner at the investment firm Findlay, Phillips and Associates. (Findlay 2002)

The article that was written by Vaga (1990), discusses how the EMH is just one of many theories that are used to explain how the markets are functioning. As there are certain aspects of the theory that are useful in understanding the overall scope of the problem. While at other times, there are a number of difficulties when applying these ideas to: changing economic conditions. This is important, because it identifies the overall strengths and weaknesses with this theory. The author is the Associate Professor of Economics at Yale. (Vaga 1990)


When you look at the information that has been examined, it is clear that there are a number of different strengths and weaknesses that are associated with the EMH. as, this theory has been touted by: many analysts and investors, as one way to understand the movements of the markets. This is because the underlying changes in prices are reflecting the current views, about the future expectations of stock prices. As a result, this makes it difficult to time the markets, due to the fact that they are always taking these views into account.

Yet, when you look beneath the surface, it is clear that that this can lead to a number of problems for investors. Most notably: the theory ignores changes in the trends and it assumes that the market is efficient all of the time. In the case of it ignoring various changes, this is problematic as investors could buy or sell stocks at the wrong time. While simultaneously, the strategy assumes that the market is: efficient all of the time. This is problematic, because it shows how there are times that this philosophy, will have trouble understanding the overall scope of some situations. This is important, because it shows how this theory has various flaws that could lead a number of severe challenges down the road for investors.

When you step back and analyze EMH, it is clear that it can provide a general idea about how: the markets are efficient to a certain extent. However, over relying on this theory can result in fatal mistakes that will more than likely result in significant losses. As the market is unable to identify changes that are occurring and it is making assumptions about the market that are not true.

Therefore, all investors must embrace a strategy that will take into account the above risks. While, at the same time they must use the various ideas to help provide some kind of basic understanding of: how the equity markets function. Once this takes place, it means that investors can be able to have a better comprehension of the investing environment and how to adapt to the changes that are taking place. In many ways, one could argue that this is the key in being able to see an increase in profits. as, the combination of these different approaches; will provide, the best overall big picture view of various events. This is important, because it shows how the EMH has implications in the world of finance by: helping to provide some understanding of the markets and how they are using various events (to reflect the most accurate prices). As a result, all investors are more than likely embracing these ideas in one way or another, to understand the markets.


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