Question

The concept of “efficient market hypothesis” has attracted a lot of debate and controversy in modern finance. As a student of finance, what critical issues would you say you have learnt about market efficiency using capital market history as your reference point?

Answer 1

There are a lot of critical issues which I have learnt about market efficiency, which would be summarised as below-

1. According to market hypothesis stock prices already reflect all such privately available and publicly available information and it is believed that they are Discounted in price.

2. One can never beat the market rate of return so active form of investment is never referred in efficient markets

3.market only reacts to the newly available information so there is no scope for private and public available information of past

4. In general investors are assumed to be rational and Markets are assumed to be efficient according to this hypothesis

5. According to this hypothesis, fundamental analysis and technical analysis are of no use, because they will not help the investor making a additional rate of return as it is already an efficient market

6. An efficient market always advocates passive form of investment and it is believed that one can never outperform the overall index rate of return.

7. There is no place for hedging and arbitraging in efficient markets

8. Earning announcement have a special consideration in efficient markets as post earning announcement drift are always considered in contradiction to semi-strong markets.