Question

"Efficient Market Hypothesis (EMH)"

Please respond to the following:

• The book discusses the Efficient Market Hypothesis (EMH) and its three forms. The EMH has a lot to do with information and stock prices. How does information get into prices? How do we know if prices reflect all available information? What are abnormal returns? What does the EMH have to say about abnormal returns?
• Please provide one citation/reference for your initial posting that is not your textbook. Please do not use Investopedia or Wikipedia.

Answer 1

Under the EMH it is assumed that the current share price in the market reflects all information about the product or company in the market. This means that any changes in the stock price of the company would reflect only the new changes in either the market conditions or the current reports about the company and its offerings.

There are conflicting views on whether the prices reflect all available information or not. While some economists believe it like an assumption, some believe that there is no other logical explanation to standardize the reasoning for equity price fluctuations. However many economists also believe that fluctuations stem from the time taken by people to understand information and also the human error in deciding the information about the future prospects of the company.

Abnormal returns are excessive profits generated via the help of either technical or fundamental analysis of the company.

The EMH comes in 3 forms - weak, semi - strong and strong. Under the weak form, abnormal returns are not possible via technical analysis ; under the semi-strong form, highly profitable outcomes are not possible under either financial or technical analysis and in the strong form, there is no scope whatsoever to earn any sort of abnormal returns because all the players make decisions in the same pattern.