Efficient Market Hypothesis

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CHAPTER 01: INTRODUCTION1

Background of the Study1

CHAPTER 02: LITERATURE REVIEW3

Introduction3

Efficient Market Hypothesis3

Importance of Efficient Market Hypothesis4

Efficiency of the Capital Markets5

Categorisation of Empirical Tests for Market Efficiency7

Empirical Evidences8

The Weak Form Efficient Market8

Testing the Weak Form of Efficient Market Hypothesis9

Objectives11

Research Question11

REFERENCES13

CHAPTER 01: INTRODUCTION

Background of the Study

For the past three decades, investors have been interested in the behaviour of the stock prices. Over the period of time, the stock market observers made attempts in order to discover whether the movements in the stock prices have followed a pattern that is discernible in nature. The mind of the investor is attracted because of the development of the rules that covers the trade transaction costs and offers returns that compensates in some way for the effort and time expended. The behaviour of the stock prices is challenging for the investors and it creates analytical problems that fascinate them.

There is a surprising consensus between the investigators of the subject that with a large number of investors, pursing similar objectives and having equal access to the information of the market, it is impossible for an individual to achieve the expected returns that are greater than those of a market as a whole. This conclusion is known as the EMH.

Despite of the results that have been obtained from the previous researches, there is doubt that the EMH has accurately described the behaviour of the stock prices in the real world. A reason for such a concern is the nature of the underlying assumptions of the models.

The basic assumptions of the EMH that were provided by Lev (1974) are: (1) the information which is available is free for all the participants of the market, (2) all the investors agree to the implications of the information that is available for the current prices of the stocks and also for the distributions of the future prices of every security. Practically, all these conditions are satisfied in a rare manner.

A number of studies related to the efficiency of the market deal with the establishment of the stock markets around the world. This body of research has verified the EMH (Efficient Market Hypothesis) demonstrates that the market investors earns fair returns and a rapid price adjustment to the new information as it is available to the public.

The EMH (Efficient Market Hypothesis) is considered to be a backbreaker for the forecasters. EMH in its simplest form effectively shows that the series is likely to forecast the returns from the assets that cannot be forecasted. The theory of EMH was confirmed during the 1960s on the basis of empirical evidences. The empirical evidences showed that the EMH was proposed on the basis of the overpowering logic that if the returns can be forecasted, most of the investors will use them for generating unlimited profits. The market participants' behaviour induces the returns that obey the EMH; else there will be a machine that will be producing unlimited wealth, which is not possible for an economy that is stable in ...