In: Economics
The efficient market hypothesis is an extension of the supply and demand model.
Required:
a. Discuss the assumptions of the supply and demand model inherent in the Efficient Market Hypothesis (EMH).
b. Why is the securities market viewed as a good example of the supply and demand model?
c. Discuss the three forms of the EMH.
Anss...
The EMH theory is an investment theory that says that the stock
market price is always efficient. By efficient, it is meant that
the price at which shares are traded in the market is always
inclusive and reflective of the market information. Thus, it is
impossible for any investor to make super-profit either by selling
stocks at an inflated price or by purchasing stocks at a reduced
price. The only way out to make super-profit is to buy risky
share.
A. Followings are the assumptions of demand and supply model
inherited in EMH:
The market/ economy has the complete information.
Prices are always adjusted of the market information.
there are no artificial restrictions on supply and demand.
B. Demand and supply always adjust with the new market information.
just like them, in the securities market, the stock exchanges
reflect a relatively competent distribution system and the
information is available from many outlets (Schroeder, 2011).It is
considered efficient if it reflects all available information and
reacts immediately to new information.
C. The EMH can be categorized into three forms:
Weak Form EMH: Suggests that all past information is priced into
securities. Fundamental analysis of securities can provide an
investor with information to produce returns above market averages
in the short term but there are no "patterns" that exist. Therefore
fundamental analysis does not provide long-term advantage and
technical analysis will not work.
Semi-Strong Form EMH: Implies that neither fundamental analysis nor
technical analysis can provide an advantage for an investor and
that new information is instantly priced in to securities.
Strong Form EMH: Says that all information, both public and
private, is priced into stocks and that no investor can gain
advantage over the market as a whole. Strong Form EMH does not say
some investors or money managers are incapable of capturing
abnormally high returns but that there are always outliers included
in the averages.