Question

Describe the three forms of the Efficient Markets Hypothesis and explain the behavioral finance critique of market rationality.Be sure to include evidence of why markets could be considered efficient and why they could be considered inefficient. Conclude by explaining if you feel markets are efficient, emphasizing why you feel that way.

Answer 1

Efficient market hypothesis theory is a theory which advocates that markets are efficient as they already discounts the publicly as well as privately available information so there is not much scope for making higher rate of return.

there are three types of efficient market which could be strong market, semi-strong market, and weak market.

Strong form of market efficiency advocates that all such privately available information which could be private or public in nature have already been discounted into the stock price and there is no scope for making any additional return as stock market will only react to newly available information.

semi strong form of market efficiency advocates that stock markets only reacts to insider and privately available information as all such publicly available information has already been discounted into the stock price.

Weak form of market efficiency advocate that the market does not reflect all such past information and there is scope for technical analysis to make an additional rate of return from the market so in a weak market technical analysis is always preferred.

I personally feel that this kind of market is semi efficient kind of market which is giving an opportunity to make an additional rate of return through availability of private information because all the public information have already been discounted into the price of the stock and hence there is a need for active investing which could be aided by insider information.