September 23, 2018

Efficient Market Hypothesis in Stock Market- under fire, challenged by Others

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The efficient market hypothesis (EMH) is an investment theory that states it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. It was introduced by French mathematician Louis Bachalier in 1900. His hypothesis was that markets are completely efficient and that all prices in the market already reflect the available knowledge and expectations of investors. EMH states that financial markets are efficient and the prices already reflect all known information concerning a stock or other security and that prices rapidly adjust to any new information

Over the past 50 years, efficient market hypothesis (EMH) has been the subject of rigorous academic research and intense debate. It has preceded finance and economics as the fundamental theory explaining movements in asset prices. The accepted view is that markets operate efficiently and stock prices instantly reflect all available information. Since all participants are privy to the same information, price fluctuations are unpredictable and respond immediately to genuinely new information.

In the recent times EMH has been receiving mixed reactions making it a highly controversial and disputed theory. There have been instances those have corroborated the fact that stock prices can deviate from their fair values. In addition, .the stock market behavior in different parts of the world over different time periods proves that markets are after all not efficient. Moreover, investors do not always make rational choices and investments. Besides, there are several stock market anomalies that contradict the EMH. Last but not the least, the recent global financial crisis clearly showed that market inefficiencies arising from behavioral biases, had made markets oscillate away from the EMH. Today’s markets are highly complex and dynamic and hence susceptible to chaos. Besides, the investment environment itself is ever changing.

Now the EMH has been challenged by many theories. Out of those theories, one that really stands out is the Adaptive Market Hypothesis {AMH} which offers an opportunity for behavioral finance to become an integrated theory. AMH recognizes complex market dynamics, cycles, trends, panic and crashes as a part and parcel of the normal market behavior.

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About Suvendu Narayan Roy 36 Articles
Author and Faculty member of Finance Analyst -Financial and Political Reputed Article writer Director - Knowgen Educational Services Pvt.. Ltd Co-editor JCBR, a cross functional business research journal