The paper "Validity of Efficient Market Hypothesis " is an outstanding example of management coursework. Efficient market hypothesis relates to the notion that a given market relies on an already set out information trend in order to allow for the determination of security prices. In essence, the market is deemed to be efficient in regards to whether security prices will be unaffected even after presenting that information to all participants (Abergel & Politi, 2013). For the few decades or so, the efficient market hypothesis has been accepted within the overall academic financial economists. The concept has been associated with securities markets where it was believed that it was effectively efficient in portraying detailed information related to individual sticks as well as the stock market (Westerlund & Narayan, 2013).
The assumption related to this perception ascertained that whenever there was information on stocks; related news would spread much more quickly and would be integrated into the different prices of the securities without any degree of delay. Following this line of reasoning, it is clear that neither technical analysis that is involved with the study of past stock prices in an effort to predict future prices or nor fundamental analysis, which is involved with the evaluation of financial information like entity’ s earnings, asset values to assist existing investors in the selection of undervalued individual stocks; would facilitate them to accomplish a greater level of returns in comparison to information that could be accessed by opting to hold a randomly selected portfolio of individual stocks with a comparable level of risk (Malhotra, Tandon, & Tandon, 2015).
Thus, the purpose of this paper is to critically examine the validity of a stronger efficient market hypothesis in relation to current literature. The concept of efficient market hypothesis can be compared with the notion of a random walk; which is basically a term that is loosely adopted within the financial literature in order to characterise a price pattern that allows consequent price alterations depict random shift from previous prices (Westerlund, Norkute, & Narayan, 2015).
The logic behind the random walk analogy lies in the fact that the overall flow of information is indeed unimpeded and that it is immediately portrayed within the individual stock prices since as the next day’ s price changes it will only be portrayed in that day’ s news and will not be related in any way with the different alterations in prices today (Sheikh & Noreen, 2012).
But off course, the news is usually unpredictable in nature hence resulting price alterations should always be unpredictable and random at all times. In consequence, prices should fully portray all known form of known detailed accounting information so that also those uninformed investors purchasing onto a diversified portfolio at a series of certain price trends ascertained by the market should also be able to obtain a given rate of return that is deemed to be fair and similar to one accomplished with the experts. In effect, at the start of the 21st century, the overall dominance of the concept began to deteriorate in regards to its universal applicability (Sheikh & Noreen, 2012).
Most of the financial economists were of the opinion that the underlying stock prices can be partially predictable in away. These experts indicated that there was a need for emphasising the psychological and behavioural concepts of stock prices evaluation and establishment.
They further postulated that the future stock prices are somehow predictable on the focus of the past stock price trends in relation to certain fundamental valuation metrics.
Abergel, F. &Politi, M., 2013. Optimizing a basket against the efficient market hypothesis. Quantitative Finance, 13(1), pp.13-23.
Campanella, F., Mustilli, M. & D’Angelo, E., 2016. Efficient Market Hypothesis and Fundamental Analysis: An Empirical Test in the European Securities Market. Review of Economics & Finance, 6, pp.27-42.
Jain, V., 2012. An insight into behavioural finance models, efficient market hypothesis and its anomalies. Researchers World, 3(3), p.16.
Malhotra, N., Tandon, K. & Tandon, D., 2015. Testing the Empirics of Weak Form of Efficient Market Hypothesis: Evidence from Asia-Pacific Markets. IUP Journal of Applied Finance, 21(4), p.18.
Sheikh, M.J. & Noreen, U., 2012. Validity of efficient market hypothesis: Evidence from UK mutual funds. African Journal of Business Management, 6(2), p.514.
Westerlund, J.& Narayan, P., 2013. Testing the efficient market hypothesis in conditionally heteroskedastic futures markets. Journal of Futures Markets, 33(11), pp.1024-1045.
Westerlund, J., Norkute, M. & Narayan, P.K., 2015. A factor analytical approach to the efficient futures market hypothesis. Journal of Futures Markets, 35(4), pp.357-370.
Zafar, S.M., Chaubey, D.S. & Bhatt, H.C., 2013. A study on efficient market hypothesis before recession: An empirical testing through random investing. ZENITH International Journal of Multidisciplinary Research, 3(4), pp.182-193.