Efficient Market Hypothesis Essay Example | Topics and Well Written Essays - 1750 words

Efficient Market Hypothesis - Essay Example On the other hand, the semi-strong form of efficient market hypothesis assumes that the stock prices fully reflect and represent the public information, mentioning and indicating that the fundamental analysis would not bring the yield of superior risk-adjusted returns. The strong-form of efficient market hypothesis is based on the assumption that the prices of securities reflect both private and public information, highlighting and indicating that the investors would be able to earn higher risk-adjusted returns. But, these three forms of efficient market hypothesis have proved some serious limitations. And these serious limitations proved their existence in the year of 1987 when the event of market crash occurred. Is it possible to rationally explain the causes of the market crash of 1987? Is it appropriate to say that markets were efficient enough to represent the prices of stocks in the required way? But, that was not end of it; rather they continued to be part of the finance histo ry. In the year of 1990, the Internet Bubble totally invalidated the rationale behind the use and application of efficient market hypothesis. On the basis of hindsight, it is clearly evident that the equity valuation, which normally heavily depends on the unpredictable and uncertain future predications, was based on irrationality and irrational and unsupportable claims. After that part, its implications in terms of validity and applicability of this theory would be critically accounted for.... In the year of 1990, the Internet Bubble totally invalidated the rationale behind the use and application of efficient market hypothesis. On the basis of hindsight, it is clearly evident that the equity valuation, which normally heavily depends on the unpredictable and uncertain future predications, was based on irrationality and irrational and unsupportable claims. In the subsequent parts of this piece of work, first the concept and theory of efficient market hypothesis would be clearly explained and highlighted. After that part, its implications in terms of validity and applicability of this theory would be critically accounted for. Definition__________________________________________ An efficient capital market is defined as a capital market in which the current price of a share or stock fully and totally represents and reflects all the stock or share related information, including the information of risk (Schweser, 2004). Furthermore, an informationally efficient capital market i s defined as a capital market in which a price of security or stock rapidly and fast adjusts as soon as a new piece of related information is arrived. This piece of definition of an efficient capital market hypothesis is based on certain assumptions, and they are: First, a considerable number of participants, who are there to increase profit or returns on stocks, tend to understand and analyse and and give value to stocks and securities, and these participants are independent of each other. Second, any piece of new information appears in a capital market in a random fashion; and pieces of information are also announced independent of each other with regard to timing as well. Third, securities and stocks investors and fund managers quickly and rapidly start estimating the prices of