Efficient Market Hypothesis Essay Example | Topics and Well Written Essays - 2500 words

Efficient Market Hypothesis - Essay ExampleImportance of effectual commercialise hypothesis can be identified from empirical implications of it in many pieces of seek and studies by empirical researchers. Literature on in effect(p) market hypothesis before LeRoy (1973) and Lucas (1978) was evolved around the random travel hypothesis and magnitude model. These are statistical description of impairment changes that can be Lo and McKinley (1988) forecasted and initially interpreted to be implication efficient market hypothesis. The first test of random passing game hypothesis was certain by J matchlesss and Cowles (1973), and they compared frequency sequence and reversal in historical growth of receiveds. They identified same signal of former pairs of consecutive renovation and the opposite sign of latter pair of consecutive return. Osborne (1959), Fama (1963 1965), Cootner (1962 1964), Fama and Blume (1966) conducted tests of random laissez passer hypothesis and supported previous studies of random walk hypothesis using historical stock return. Lo and McKinley (1988) inform that variance of two week stock return is double the variance of one week stock return. They conducted this test on US indexes from 1962 to 1985. French and Roll (1985) identified from their study that variance of stock return over weekends and holidays are much lower than variance of week days, especially first three weekdays of a week. Poterba and Summers (1988) and Fama and French (1988) found out negative correlation in US stocks indexes return from stock return data of 1962 to 1986 actually occurs.... In the process they use different forecasting techniques as well as some valuation methods. The combination of the techniques helps them in their decisions regarding investments. However, the hypothesis states that the techniques are not effective and no one has the capability to predict the outperformance of the market. If the investors enjoy any advantage, it is supposed not to exceed the incurred cost of transaction and research (Timmermann, & Granger, 2003, p.5). Literature review The origin of efficient market hypothesis can be traced back in the studies of two individuals in 1950s. One is Paul A. Samuelson and the other one is Eugene F. Fama. They identified the notion of market capacity from two different research agendas. Samuelssons contribution in the invention of EMH was great, and the researcher summarized that in efficient market, changes in asset (stocks, bonds and other traded instruments) price can be forecasted if these are properly anticipated. This means price should fully incorporate all the information and expectation of all the market participants. In contrast to Samuelsson, Fama surd on statistical measures of stock price and resolving the debate regarding technical psychoanalysis and fundamental analysis of stock price. This researcher summarized that current price stocks fully reflect all information available to market partici pants. These two empirical research studies on this critical area of finance have helped many researchers thereafter to develop several econometric single or multifactor linear asset pricing models (Seweel, 2011, p.4). Random walk hypothesis Importance of efficient market hypothesis can be identified from empirical implications of it in many pieces of research and studies by empirical researchers.