The Efficient Market Hypothesis Essay Example | Topics and Well Written Essays - 1500 words

The Efficient Market Hypothesis - Essay ExampleIn this way, only knowledge bears the power to move market prices.There happens to be three levels of market strength as delineated by Fama (1970) viz. weak, semi-strong and strong. fit to Fama (1970), weak form of market efficiency that market prices are stirred by a stocks past performance and previous returns. The semi strong form of market efficiency suggests that market prices reflect all the available information. This degree of market efficiency exists when there are no under or over valued securities in the market and when new information affects market prices really rapidly. The strong form of market efficiency elaborates that all types of information, whether public or private, affects market price of securities. in spite of the importance of the Efficient Market Hypothesis, its validity is highly debatable in the literature which is discussed in this essay.According to the Efficient Market Hypothesis, stock prices move in negative and positive directions while responding to information and annunciation of events. However, there has been staunch concern owing to market anomalies that indicate deviations from Efficient Market Hypothesis much(prenominal) as Holiday effect e.g. Ariel (1990), Monday effect e.g. French (1980), November effect e.g. Bhabra, Dhillon and Ramirez (1999), January effect e.g. Bhardwaj and Brooks (1992) and P/E ratio effect e.g. Basu (1977). Critics are also of the view that movements in stock prices also reflect psychological factors and irrationality on the part of investors e.g. La Porta, Lakonishok, Shliefer, and Vishny (1997), Shleifer and Summers (1990) etc.. There has also been significant evidence that economic conditions smashing affect stock returns e.g. Schwert (1989). The following paragraphs examine the Efficient