Market Efficiency Theory - Essay

Topics: Finance, Fundamental analysis, Stock market Pages: 4 (1474 words) Published: March 24, 2010
“Every event, no matter how remote or long ago, echoes across all other events.” (Mandelbrot, 2004) Modern financial implications perceive every action/reaction on markets as a result/cause of more complex, mutually dependent events. Studies of these relations began with the simplest ‘random walk’ hypothesis stating that price reactions are unforecastable. It was supported by ‘martingale’ stochastic process. Theoretically it is not possible to fully exist, as there would be no place for speculation and participants would become more like gamblers than stock traders. However it laid foundations to further studies. Use of more sophisticated technology enabled to determine non-random movements and anomalies in asset prices. Suspicious fluctuations, after investigation, brought up conclusions that were not based on probability but mainly on informational influence. The extreme hypothesis represented an abstract situation, where all information were reliable and truly reflect value of securities. Overvalued or undervalued assets would not exist. Efficient Market Hypothesis was affecting economical environment for last four decades. Financial practice along with further academic examinations have strongly relied on it outcomes (Roll, 1997). Despite inconsistencies, like behavioural forces, it was not rejected. Some financers has started a debate about deceptive influence of EMH on traders. They are claiming that lack of risk amendments in the theory caused participants to have "chronic underestimation of the dangers of asset bubbles breaking" (Nocera, 2009) The purpose of this paper is to analyse impact of Efficient Market Hypothesis on Modern Financial Theory principles and practice and as the essence to highlight relativeness of this dependence. It is going to point major financial tools based on EMH and subsequently present the influence from investors’ and companies’ point of view. Highlighting the importance of markets being efficient is possible by mentioning...

References: Mandelbrot, B. & Hudson, L., 2004. Misbehaviour of markets. Basic Books, pp. 229.
Lo, A., 1997
Nocera, J., 2009. Poking Holes in a Theory on Markets. New York Times, 5 June.
Lumby, S
Arnold, G., 2008. Corporate financial management. Pearson Education, pp.602-603.
Atrill, P
Ball, R. 2003. The Theory of Stock Market Efficiency: Accomplishments and Limitations. Wiley-Blackwell. 4th ed. pp.11-15
Bibliography
Mandelbrot, B. & Hudson, L., 2004. Misbehaviour of markets. Basic Books, pp.11-103.
Lo, A., 1997
Nocera, J., 2009. Poking Holes in a Theory on Markets. New York Times, 5 June.
Lumby, S
Arnold, G., 2008. Corporate financial management. Pearson Education, pp.565-614.
Atrill, P
Pike, R. & Neale, B. 2006. Corporate finance and investment: decisions & strategies. 5th ed. Pearson Education
Baskin, J
Stern, J. & Chew, D. 2003. The revolution in corporate finance. 4th ed. Wiley-Blackwell, Ch. 2
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