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Efficient Market Hypothesis: Myth of Reality?The efficient market hypothesis (EMH) was promoted by Eugene Fama in the 1960. In his classic paper Fama (1970) defined market in which prices always fully reflect available information as "efficient".While this definition reflects the main idea of the EMH it might be extended to explain the underlying assumption. For example Malkiel (1992) proposed the following definition: As it follows from the Malkiel (1992) definition if the market is efficient the company market value should be an unbiased estimate of the true value. Nevertheless it is important to stress that: What are the implications of the market efficiency from the individual investor perspective? Nevertheless it is important to stress that markets are not efficient due to their nature, but they are driven to efficiency by the actions of the investors. Therefore Roberts(1967) distinguished among three forms of the market efficiency: Obviously in reality, investors have access to different information sets. While trading which is based on the insider information is prosecuted, analysis and interpretation of the publicly available information requires specific knowledge and skills (Papers4you.com, 2006). Therefore the efficient market should be seen as a self correcting mechanism, where inefficiencies appear at regular intervals but disappear almost instantaneously as investors find and trade on them. EMH has wide applications in the financial markets, since it is easily extended to the valuation of companies , market failures such as an Enron Case, or performance analysis of the mutual funds. The traditional analysis of the market efficiency is based on the analysis of the anomalies such as Peso Effect in the foreign exchange market or devoted to the predictability of the stock returns. References Damodaran )nline (2006) "MARKET EFFICIENCY - DEFINITION AND TESTS", Available from: http://pages.stern.nyu.edu/~ADAMODAR/NewHomePage/invemgmt/effdefn.htm [17/06/2006] Fama E. F., 1970, Efficient capitalmarkets: Areviewof theory and empiricalwork, Journal of Finance, 25, 383-417. Malkiel B (1992) Efficient market hypothesis. In NewMan P.M. Milgate ,and J Eawells (eds). The new Palgrave dictionary of Money and Finance. Papers For You (2006) "C/F/94. Validity of the Efficient Market Hypothesis", Available from http://www.coursework4you.co.uk/sprtfina2.htm [17/06/2006] Papers For You (2006) "E/F/38. Efficient market hypothesis: theory and implications", Available from Papers4you.com [18/06/2006] Robersts, H. 1967. Statistical versus clinical predictions of the stock markets. Unpublished manuscript, Center for research in Security Prices, University of Chicago, May.
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Article Tags: Efficient Market Hypothesis, MARKET EFFICIENCY Article Source: http://www.articlesbase.com/marketing-articles/efficient-market-hypothesis-myth-of-reality-40432.html About the Author:
Copyright © 2006 Verena Veneeva. Professional Writer working for http://www.coursework4you.co.uk
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