Abstract
According to the Efficient Market Theory, it should be extremely difficult for an investor to develop a "system" that consistently selects stocks that exhibit higher than normal returns over a period of time. It should also not be possible for a company to "cook the books" to misrepresent the value of stocks and bonds. An analysis of current literature, however, indicates that companies can and do "beat the system" and manipulate information to make stocks appear to perform above average. An understanding of the underlying inefficient "human" factors in the market equation is necessary in order to account for the flaw in Efficient Market Theory.

Efficient Market Theory: A Contradiction of Terms Efficient Market Theory (EMT) is based on the premise that, given the efficiency of information technology and market dynamics, the value of the normal investment stock at any given time accurately reflects the real value of that stock. The price for a stock reflects its actual underlying value, financial managers cannot time stock and bond sales to take advantage of "insider" information, sales of stocks and bonds will not depress prices, and companies cannot "cook the books" to artificially manipulate stock and bond prices. However, information technology and market dynamics are based upon the workings of ordinary people and diverse organizations, neither of which are arguably efficient nor consistent. Therefore, we have the basic contradiction of EMT: How can a theory based on objective mechanical efficiency hold up when applied to subjective human inefficiency?

As a case in point, America Online (AOL) offers a classic example of how investors can be misled by a company that uses the market system against itself. AOL, up until early November of this year, used an accounting system that effectively "cooked their books" and provided misleading figures on the company's performance. Instead of accounting for its promotion...

...EFFICIENTMARKETTHEORY AND TESTS
Introduction
Market Efficiency
A market is said to be efficient if prices in that market reflect all available information. Market efficiency refers to a condition in which current stock prices reflect all the publicly available information about a security.
Efficientmarket emerges when new information is quickly incorporated into the share price so that the price becomes information. In other words the current market price reflects all available information. Under these conditions the current market price in any financial market could be the best (unbiased estimate) of the value of the investment.
The Theory of EfficientMarket Hypothesis
The EfficientMarket Hypothesis (EMH) was first defined by Eugene Fama in his financial literature in 1965.He defined the term "efficientmarket" as one in which security prices fully reflects all available information.
EMH is the theory describing the behavior of an assumed “perfect” market which states that:
Securities are fairly priced and that their expected returns equal their required return.
Security prices, at any one point, fully reflect all public information...

...Part 1
According to the model of efficientmarket, the stock prices should be taken as the best forecast to calculate the discounted future dividend provided with an available information set. The efficientmarketstheory (EMT) explains that all relevant information about the intrinsic value of an asset is reflected in the price of that asset (Dimson and Mussavian 2000). Hence, this theory assumes that the financial markets tend to be efficient in information.
Market efficiency is further classified into three forms by Fama (1970) namely; weak form market efficiency, semi-strong form and strong form market efficiency. A market is efficient in weak form if the predictions regarding stock price changes could not be made based on information about past returns or any other market based indictor e.g. ratio of puts to calls and the trading volume. A market will be considered weak form efficient when the information about historical prices is reflected in the current prices. This implies that the stock prices will be serially correlated and thus the investors cannot develop a trading rule which is based on past price patterns in the hope of earning an abnormal return.
The semi strong form of market efficiency is based on the notion that the...

...MARKET EFFICIENCY - DEFINITION AND TESTS
What is an efficientmarket?
Efficientmarket is one where the market price is an unbiased estimate of the true value of the investment.
Implicit in this derivation are several key concepts -
(a) Market efficiency does not require that the market price be equal to true value at every point in time. All it requires is that errors in the market price be unbiased, i.e., that prices can be greater than or less than true value, as long as these deviations are random.
(b) The fact that the deviations from true value are random implies, in a rough sense, that there is an equal chance that stocks are under or over valued at any point in time, and that these deviations are uncorrelated with any observable variable. For instance, in an efficientmarket, stocks with lower PE ratios should be no more or less likely to under valued than stocks with high PE ratios.
(c) If the deviations of market price from true value are random, it follows that no group of investors should be able to consistently find under or over valued stocks using any investment strategy.
Market Efficiency for Investor Groups
Definitions of market efficiency have to be specific not only about the market that is being considered but also the investor group that...

...behavioral aspects in finance. This means that financial markets are subject to different investors’ sentiments and that markets are not efficient, i.e. the efficientmarket hypothesis (EMH) does not hold. The supporters of EMH argue that all available information is included in the stock prices, which means that any long-term abnormal returns earned are a matter of chance. On the other side, the supporters of behavioral finance argues that because of over- and under-reaction by investors to information, it takes time before prices fully adjust and thus there is an opportunity to earn long-term abnormal returns.
In 1998 Eugene F. Fama published a famous critique on long-term return anomalies. He infers that all anomalies that was pointed out in scientific papers up until then where a matter of chance. His argues that it is easy to show the weaknesses of behavioral models and proof of anomalies. If there is a more or less even split between over- and under-reaction, and continuation and reversal of returns, then this supports the market efficiency hypothesis that any abnormal returns are chance. He also infers that with a reasonable change in methodology used, the anomalies are severely reduced or disappears completely.
In the years after his critique was published there have been a lot of papers contradicting Fama’s view and giving support...

...walk hypothesis based on monthly stock market returns is tested by comparing variance ratios. The random walk model is not rejected for the entire sample period (1926-2007) and for its subperiods when using value-weighted stock returns. However, the model is rejected on equal-weighted stock returns when using low aggregation values q. Generally, the random walk model is not rejected when using monthly data.
It was widely believed that the market isefficient in reflecting all available information that no abnormal returns can be earned by studying the historical prices. However, some recent papers suggest that stock prices are partially predictable. In this paper, I test the weak form efficiency of the market using the variance ratio test by Lo and Mackinlay (1988). And the result yields that the market generally follows the random walk for monthly stock returns. The rest of the paper is organized as follows. In section 1, the previous main findings on the EfficientMarket Hypothesis are reviewed. The data and sample period are described in section 2. The main results are given in section 3, where tests for both homoscedastic and heteroscedastic random walks are conducted. Section 4 is the conclusion of this paper.
1. Related literature on EfficientMarket Hypothesis
According to Eugene Fama's (1970) survey article, "Efficient...

...EfficientMarket Hypothesis
EfficientMarket Hypothesis (EMH) is the theory behind efficient capital markets. An efficient capital market is one in which security prices reflect and rapidly adjust to all new information. The derivation of the EMH is mostly credited to the work of Fama. In 1965 the doctoral dissertation written by Fama was republished. In this Fama looks at the current literature on stock price behaviour and examines the distribution and dependence of stock price returns. He concluded that, 'it seems safe to say that this paper has presented strong and voluminous evidence in favour of the random walk hypothesis.'
Due to a better understanding of price formation in competitive markets, the random walk model was now seen as a set of observations that can be consistent with the efficientmarkets hypothesis. This switch began with observations published in a paper by Samuelson in 1965. Samuelson presented his proof in the general form, which helped in the understanding of the notion of a well-functioning market. His paper had the observation 'in competitive markets there is a buyer for every seller. If one could be sure that a price would rise, it would have already risen.' Samuelson stated that 'arguments like this are used to deduce that competitive prices must...

...Definition of 'EfficientMarket Hypothesis - EMH'
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. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.
Explanation of 'EfficientMarket Hypothesis - EMH'
Although it is a cornerstone of modern financial theory, the EMH is highly controversial and often disputed. Believers argue it is pointless to search for undervalued stocks or to try to predict trends in the market through either fundamental or technical analysis.
Meanwhile, while academics point to a large body of evidence in support of EMH, an equal amount of dissension also exists. For example, investors, such as Warren Buffett have consistently beaten the market over long periods of time, which by definition is impossible according to the EMH. Detractors of the EMH also point to events, such as the 1987...

...An efficientmarket is a market in which prices can always fully reflect available information. According to Andrei Shleifer, Market efficiency is theoretically based on three conditions, which are investor rationality, independent deviations from rationality and unlimited arbitrage. If three conditions cannot be satisfied, the market might be not efficient. Thus, investors’ rational behavior leads to stockmarket efficiency.
For instance, when a company releases new information, for all investors, they will adjust their estimates of stock prices in a rational way. Then anyone interested in selling and buying would sell and buy at an adjusted price, so the price rises. It means that the adjusted price fully absorbs the information and it follows the efficientmarket.
Instead, if investors are not rational, the shock market will fail to be efficient. As we consider irrational investor cannot price the stock correctly, stock price fail to reflect all available information. In other words, irrational investors can violate market efficiency.
In fact, it is idealistic that all investors need to behave rationally. Market is still efficient if another two situations hold.
As mentioned above, it is true that people in general do demonstrate behavioral biases or...