Define the efficient market hypothesis (EMH). Discuss the real world evidence for the EMH, including differences across countries. Identify investment behaviors and trading biases that suggest investors ignore the evidence supporting the EMH.
The efficient market hypothesis is a financial, economic theory that states that the available information is reflected in the prices of the assets present. The market prices change with time; therefore, it is hard to reign in the market; this is because new information emerges frequently. The theory was illustrated by Bergen (2004), he stated that the full stock trades at fair prices and values were, therefore, enabling investors not to purchase undervalued commodities and also sell them at inflated prices. The hypothesis further indicates that it is impossible to outdo the market structure through the wise selection of the products to major into; this does not guarantee a high investment return.
The EMH includes several variants; weak, strong and semi-strong (Justin, 2009). The weak one indicates that the traded assets' prices depend on the already established information; such assets include bonds, stocks, and properties. The semi-strong hypothesis suggests that new information or the available ones directly influences the prices of the assets. Finally, strong EMH illustrates that the prices of the assets are affected even by the information that can be traced.
According to Desai (2011), the United Kingdom's stock market has EMH that is a weak system. This is as a result of the release of information on important trade position based on binding other than the use of existing knowledge. The bidding system uses current information on the market price. This market variability is witnessed in many stock markets in the world such as China, Japan, and Germany.
Investors have been noted to invest in assets and other commodities only because the price has picked up and the demand is high (Desai, 2011). In this case, the investor heavily relies on current market information. This information is usually not correct since the demand starts to diminish gradually and this may cause a risk of losses.
Bergen, J. (2004). “Efficient market hypothesis: Is the stock market efficient?” Investopedia
Desai, S. (2011). “Efficient market hypothesis. Retrieved on 15 April 2019.
Justin, F. (2009). The myth of the rational market. Harper business.
by EssayRoyal, Dec. 10, 2019, 5:17 p.m.