efficient market hypothesis

• Efficient Market Hypothesis

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Corporate governance Systemic problems of corporate governance

1 Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small

shareholder. The traditional answer to this problem is the efficient market hypothesis

(in finance, the efficient market hypothesis (EMH) asserts that financial

markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors.

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Ben Goertzel - Papers

1 * Pressing, J., Goertzel, B., Wood, T. Pazer, L. (2000). Enhanced market prediction using textual analysis: Limitations in the efficient market

hypothesis. Proceedings of the International Conference on

Advanced Investment Technology 1999, Bond University.

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Quantitative behavioral finance - History

1 The prevalent theory of financial markets during the second half of the 20th century has been the efficient

market hypothesis (EMH) which states that all public information is

incorporated into asset prices

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History of economic thought - Eugene Fama and the efficient market hypothesis

1 In 1965 Chicago School economist Eugene Fama (1939–) published The

Behavior of Stock Market Prices, which found that stock market prices follow a random walk, proposing the Efficient market hypothesis|Efficient Market Hypothesis, that randomness

is characteristic of a perfectly functioning financial market

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History of economic thought - Other contemporary economists

1 Shiller (1946–) published Do stock prices move too much to be justified by

subsequent changes in dividends?, shocking the economics community by

challenging the accepted Efficient Market Hypothesis, arguing that in a

rational stock market, investors would base stock prices on the expected

receipt of future dividends, discounted to a present value

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Technical analysis - Scientific Technical Analysis

1 In this study, the authors found that the best estimate of tomorrow's price

is not yesterday's price (as the efficient market hypothesis would

indicate), nor is it the pure momentum price (namely, the same relative price change from yesterday

to today continues from today to tomorrow)

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Stock valuation - Market criteria (potential price)

1 Some feel that if the stock is listed in a well organized stock market, with a

large volume of transactions, the listed price will be close to the

estimated fair value. This is called the efficient market hypothesis.

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JEL classification codes - Financial economics JEL: G Subcategories

1 ::JEL: G14 – Information and Efficient market hypothesis|Market Efficiency;

Event study|Event Studies

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Market anomaly

1 A 'market anomaly' (or market inefficiency) is a price and/or rate of

return distortion on a financial market that seems to contradict the

efficient market hypothesis.[http://www.investorhome.com/anomaly.htm Market anomaly][http://www.investorhome.com/anom

aly.htm Historical Stock Market Anomalies]

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Adaptive market hypothesis

1 The 'adaptive market hypothesis', as proposed by Andrew Lo,Lo, 2004. is an attempt

to reconcile economic theories based on the efficient market hypothesis (which implies that

markets are market efficiency|efficient) with behavioral economics, by applying the

principles of evolution to financial interactions: competition, adaptation and natural

selection.http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20050207/SUB/

502070709/1008/TOC

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Adaptive market hypothesis - Details

1 According to Lo,Lo, 2005. the adaptive market hypothesis can be

viewed as a new version of the efficient market hypothesis, derived

from evolutionary principles:

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Fair price - Fair value vs market price

1 * The efficient market hypothesis asserts that, in a well organized,

reasonably transparent market, the market price is generally equal to or close to the fair value, as investors

react quickly to incorporate new information about relative scarcity, utility, or potential returns in their

bids; see also Rational pricing.

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Gunduz Caginalp - Statistical time series modeling

1 The efficient market hypothesis (EMH) has been the dominant theory for financial markets for the past half

century

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Gunduz Caginalp - Mathematical modeling using differential equations

1 (I) Unlike the EMH, the model developed by Caginalp and

collaborators since 1990 involves ingredients that were marginalized

by the classical efficient market hypothesis: while price change

depends on supply and demand for the asset (e.g., stock) the latter can depend on a variety of motivations and strategies, such as the recent

price trendhttps://store.theartofservice.com/the-efficient-market-hypothesis-toolkit.html

Eugene Fama - Early life

1 All of his grandparents were immigrants from Italy.Colin Read, The

Efficient Market Hypothesists: Bachelier, Samuelson, Fama, Ross,

Tobin and Shiller, Palgrave Macmillan, 2012, [http://books.google.ca/books?

id=6EliRIe3uaECpg=PA94dq=%22Francis+Fama+(1910-?)

%22hl=ensa=Xei=ymZcUtvdJ9G64APl1IGYDgved=0CCMQ6AEwAA p

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Stock - Share price determination

1 In professional investment circles the efficient market hypothesis (EMH) continues to be popular, although this theory is widely discredited in academic and professional circles

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Modern portfolio theory

1 MPT also assumes that investors are Homo economicus|rational and

markets are efficient market hypothesis|efficient.

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Modern portfolio theory

1 Further, there remains evidence that investors are not rational investor|rational and markets may not be

efficient market hypothesis|efficient.Andrei Shleifer: Inefficient

Markets: An Introduction to Behavioral Finance

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Modern portfolio theory - Assumptions

1 * 'All investors aim to maximize economic utility (in other words, to make as much money as possible,

regardless of any other considerations).' This is a key

assumption of the efficient market hypothesis, upon which MPT relies.

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Modern portfolio theory - Assumptions

1 * 'All investors are rational and risk-averse.' This is another assumption of the efficient market hypothesis

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Neoliberalism - Neoliberal economics

1 At the same time, the efficient market hypothesis assumed that, because of catallaxy, the market

could not be informationally wrong

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Dow Theory - Six basic tenets of Dow theory

1 #: Stock prices quickly incorporate new information as soon as it

becomes available. Once news is released, stock prices will change to reflect this new information. On this point, Dow theory agrees with one of the premises of the efficient market

hypothesis.

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Elliott wave principle - Criticism

1 The premise that markets unfold in recognizable patterns contradicts the

efficient market hypothesis, which states that prices cannot be

predicted from market data such as moving averages and volume

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Tulip mania - Modern views

1 However, research into tulip mania since then, especially by proponents of the efficient market hypothesis,

who are more skeptical of speculative bubbles in general,

suggests that his story was incomplete and inaccurate

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Tulip mania - Social mania and legacy

1 Despite the mania's enduring popularity, Daniel Gross of Slate

(magazine)|Slate has said of economists offering efficient market

hypothesis|efficient market explanations for the mania, that If

they're correct..

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Information good - Economic Theory and the treatment of Information

1 In Economics, information plays at least a double role. On one side,

perfect information is a key element to explain efficient market

hypothesis. Here, information is understood to be instantly available for everybody at no cost and being

complete.

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One share, one vote - Systemic problems of corporate governance

1 * Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis

(in finance, the efficient market hypothesis (EMH) asserts that financial

markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors.

https://store.theartofservice.com/the-efficient-market-hypothesis-toolkit.html

Economic theory - Macroeconomics

1 Since at least the 1960s, macroeconomics has been

characterized by further integration as to microfoundations|micro-based

modeling of sectors, including rational expectations|rationality of

players, Efficient market hypothesis|efficient use of market information,

and imperfect competition.Yew-Kwang Ng|Ng, Yew-Kwang (1992)

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George Soros - Reflexivity, financial markets, and economic theory

1 He argues that, when markets are rising or falling rapidly, they are

typically marked by disequilibrium rather than equilibrium, and that the conventional economic theory of the

market (the 'efficient market hypothesis') does not apply in these

situations

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Security market line - Security Market Line, Treynor ratio and Alpha

1 beta), which contradicts the efficient market

hypothesis.

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A Random Walk Down Wall Street

1 The book is frequently cited by those in favor of the efficient market hypothesis

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A Random Walk Down Wall Street - Alternative view

1 In 1984 Warren Buffett gave a speech at Columbia University rebutting Malkiel's book and the Efficient Market Hypothesis. See The Superinvestors of Graham-and-Doddsville. As of 2013 Malkiel has not yet responded, and

has ignored Buffett's argument. As Seth Klarman has stated: Buffett's argument has never, to my knowledge, been addressed by the efficient-market theorists; they evidently

prefer to continue to prove in theory what was refuted in practice.

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Financial market efficiency - Random Walk theory

1 Another theory related to the efficient market hypothesis created by Louis Bachelier is the “random

walk” theory, which states that the prices in the financial markets evolve

randomly and are not connected, they are independent of each other.

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Fundamentally based indexes - Rationale of weighting by fundamentals versus other methods of index weighting

1 The traditional method of capitalization-weighting indices

might by definition imply overweighting overvalued stocks and underweighting undervalued stocks,

assuming a Efficient market hypothesis|price inefficiency.Hsu,

Jason

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Nobel Memorial Prize in Economic Sciences - Controversies and criticisms

1 Shiller claimed that Fama efficient market hypothesis makes little

sense, except in fairly trivial waysRobert J

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