Implications of the efficient market hypothesis

¶ … Efficient Market Hypothesis

Implications of Efficient Market Hypothesis: It is required to critically review the existing literature on the implications of efficient market hypothesis

In the article that was written by Burton (2003), it discusses if the Efficient Market Hypothesis (EMH) is accurate. Simply put, the EMH is when there the markets are taking all relevant information and has priced in various possibilities for future events. With the theory supporting the idea, that it is impossible to time the markets, based upon these views being reflected in equity prices. This means that other forms of analysis that are looking for: trends and anomalies are inaccurate. As the theory believes that the overall returns are based upon: randomly selecting the right investments at the right time (the random walk theory). However, over the last twenty years a number of economists and analysts have been discrediting the effectiveness of the EMH. In this article the author is showing how this theory is providing the most accurate information about what is happening with stock prices. As there is an examination of: the 1987 stock market crash and the Internet bubble. The results were: that the stock markets are more efficient and less predictable. This makes analyzing asset prices, to identify trends as less important. The reason why is: the markets have taken various factors into consideration. (Burton 2003) This is important, because it is showing how the EMH is supporting the underlying causes. As to why it is so challenging to outperform the major market averages. The authors on this study were working in conjunction with University of Chicago and Econometric Society.

The article that was written by Fema (1991), talks about the effectiveness of the EMH through: conducting a literature review of the most relevant information since the 1970s. As they are looking at a number of different areas to include: short horizon returns, long horizon returns and contrarian viewpoint. The results were that various returns were predictable using a number of different tools to include: dividend yields, E / P ratios and default spreads on junk bonds. This is important, because it showing how other factors can be used, to highlight how the EMH is not always reflecting all available information. (Fema 1991) the author is a professor at the University of Chicago Graduate School of Business.

In the article that was written by Schiller (2003), it discusses the how the EMH has weaknesses of: misinterpreting major events and relative valuations are hard to determine over the course of time. This is important, because it shows how the EMH has a number of flaws that can lead to major mistakes. As a result, more research needs to be conducted to highlight the overall strengths and weaknesses of this theory. Once this occurs, it will provide the greatest insights as to how effective it is at analyzing equity prices. (Schiller 2003) the author is a professor at Yale University and is a research associate for the National Bureau of Economic Research.

In the article that was written by Jaffe (1976), it talks about how the securities markets are efficient at being able to: identify all relevant information surrounding future stock prices. As they have identified a special model and information that can help sophisticated traders. As this theory can be used along with the pricing model; to find, better trading opportunities through the market maker. The market maker uses the differences between the bid and ask (also known as the spread) to be able to increase the overall return. As a result, the EMH can be used in conjunction with various trading irregularities to identify unique trading opportunities. In this aspect, the author believes this can provide above average returns in conjunction with the models he has identified. This is important, because it is showing how the EMH is providing a way to see new trading opportunities. The authors working on the study were from the University of Indiana and the University of Pennsylvania. (Jaffe 1976)

In the article that was written by Fema (n.d.), it discusses the EMH through a series of different tests that were being conducted. These include: weak form tests, semi-strong form tests and strong form tests. After conducting these different tests by: using a variety of mathematical formulas, researchers determined that the EMH is the most accurate theory surrounding the equity markets. At the same time, they found that trying to scientifically disprove this idea is challenging. as, it exists to: a certain extent at every level on the markets, reflecting these different views. The author is a professor at the University of Chicago Graduate School of Business. (Fema n.d.)

In the article that was written by Basu (1977) it talks about if the EMH can predict the movement of the stock market. as, its ideas are compared to using various valuation tools from: fundamental analysis (most notably PE ratios), to identify stocks that are oversold. The results were that stocks with low PE ratios outperformed the market averages (indicating some kind of anomaly). While, socks that were trading at higher valuations tend to follow the major market averages. This is important, because it is showing how the EMH can identify certain general trends inside the market. However, there are times when stocks will become oversold; which improves the overall return. The authors for this article all are affiliated with the Cornell School of Business. (Basu 1977)

In the article that was written by McDonald (1987) it discusses the impact of the EMH on the currency markets. This is conducted by studying the movements of the Singapore dollar between 1978 and 1983. The results were that there was a correlation between the movements of the currency and various announcements from the Singapore Monetary Authority. This is important, because it shows how the EMH is already factored in by traders and investors. The authors are professors at the Department of Political Economy at the University of Aberdeen. (McDonald 1987)

In the article that was written by Jensen (1978), it talks about how the EMH has often been relied on as one way to understand what is happening in the market. Yet, beneath the surface it is unable to explain all of the different movements that were taking place. To answer these different questions, researchers began to study the markets in comparison with unplanned events. The results were that the EMH is beginning to have a disconnect, with the theory, unable to identify when changes were taking place. This is important, because it shows how the widespread acceptance of this theory has caused various inaccuracies to occur. The author is a professor of Business and Economics at Harvard University (Jensen 1987)

In the article that was written by Bont (1985), it examines the overall impact the EMH can have in determining various movements of the markets. The results were that when the markets are overacting the EMH has been proven to be incorrect. At the same time, they found that various seasonal factors such as the January effect could provide above average returns. This is important, because it is showing how the EMH can miss critical changes that are taking place in the markets. (Bont 1985) the author is a professor of Economics at Stanford University. (Bont 1985)

The article that was written by LeRoy (2010), discusses how the EMH has been often cited as way of understanding the markets. Yet, when you look beneath the surface a number of different factors could have an impact upon the how effective it is. The most notable include a lack of comparative analysis over: long periods of time and making too many assumptions. This information is important, because it is showing how this could have an impact upon the EMH, understanding all relevant information. The author is an economist with the Brooking Institute and author. (LeRoy 2010)

The article that was written by Maskin (1990), talks about how the markets are efficiently analyzing all available information. This has limited the overall return that most shareholders are receiving. As a result, many have begun to focus on finding better returns through insider trading. This is important, because it shows how the EMH is able to understand the overall shifts that are occurring in the market. As traders and investors will seek out other ways of obtaining information before it is released to the public. The author is a professor at Harvard University. (Maskin 1990)

The article that was written by Chen (2001), discusses the EMH and random expectations hypothesis. The results were that after analyzing both in comparisons with other factors. Researchers were able to show, how they can reflect the different attitudes and ideas that many people will have about the markets going forward. This is important, because it shows how the EMH can provide accurate assessments, as to if an underlying assets class has become risky. The author is a researcher and scholar at the Institute for Economics in Taiwan. (Chen 2001)

The article that was written by Burton (2005), examines how: various analysts and mutual fund managers are unable to outperform the stock market. 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)