Question

Discuss the concept of Efficient Market Hypothesis and major implications of the Efficient Market Hypothesis. After that, please provide a comprehensive review on evidence in support of the Efficient Market Hypothesis and evidence against the efficient market hypothesis (comprehensive means that you need to give a very clear description of each evidence).

Answer 1

Efficient market hypothesis is a concept that says that market prices reflect all the information about the stock which can affect its price. There are basically three forms of efficient market hypothesis, weak form of efficiency, semi strong form of efficiency and strong form of efficiency. The weak form efficiency states that prices of the traded assets already reflect all the historical information about the stock, so by analyzing price patterns you can not generate consistently excess return. The semi-strong form states that price reflect past information as well as prices change to new publicly available information. The strong form efficiency states that prices have already been adjusted for all the private or insider information so even if you have some insider information you can not consistently generate excess return from the market. The strong form of efficiency indicates that even if some senior management of the company has some insider information, they can not benefit from it since prices would have already been adjusted for it. The evidence in real world for efficient market hypothesis is that in the short -term it does not hold true because of the excess volatility in the market but in the long-term the efficient market hypothesis holds as stock prices are closer to their intrinsic value.However the term log-term is not really clear as to how much time it would take to adjust itself.