The Theory Behind The Efficient Market Hypothesis Finance Essay - Free Essay Example

If an investor his money in the stock market, he wants to achieve a good return on invested capital. Nowadays, many business people are trying to market their money to beat, because they aim to achieve not only a profit. However, market efficiency the efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, sat down, suggests that market at any given time, prices fully reflect all available information about a particular stock and / or. Thus, according to the EMH, no investor has an advantage in predicting a return on the stock price, because no one has access to information not already available for everyone else. The influence of efficiency: non-predictability: Is (information on economic events, political and social impact on investors, because the information is not limited to research and financial news, it depends on the investor, as he perceives this information, this message is reflected in its share price. Reports for theory efficient markets are markets that all members have the same information about the prices, and they respond to this information, and no one has the ability to profit from anyone Goth Prices in the market are random and are not predictable, so that the procedure to invest money can be recognized, then you can not plan its investment and that is why he can not be successful. EMH has this hike in prices, which caused the goal to beat the market consistently causes of failure to invest in the market. In fact, it is profitable to invest in index funds for an investor to make profits. Anomalies: The challenge for the efficiency: There are some arguments have EMH in this world of investments and the market from investors such as Warren Buffet, whose strategy is to stock that is undervalued, who provides an example for followers to beat by a great deal of money. There are managers who get the better results as compared to others, and compare with others than when we try to invest in areas, then there exists renowned research analysis, so if you to hit the market and then profit, as the performance can be random. There are arguments that states that EMH are present, and here are some examples of how effects of the weekend, she recommends the purchase on Monday morning and Friday afternoon, the prices are different on weekends versus weekdays. The prices are higher in January for the start of the new year and show a higher return. Funding of studies on the psychology of investors on the prices defined so that it can be some procedures in the stock market. Investors are happy to review, which is undervalued, and they tend, the overvaluation of the market participants and the result is yours to buy, is efficient. Investors or short-term shareholder move into and out of the hottest and newest stock proposed because of the mass mentality of the trendy, through economic MIT professor Paul Krugman. The result is then on the prices in a bad shape and the market will not result in the air. The prices are not the information available on the market. Rather than be manipulated for profit-seekers to understand the prices. The EMH answer: The EMH does not dismiss the possibility of anomalies in the market, which is in the production of the highest profit. In fact, market efficiency is not required, the prices equal to fair value all the time. The prices may be overvalued or undervalued is only in random events, so they eventual ly returned to their means. As such, because the deviations from the fair price of a stock at random to investment strategies that can not be beaten in the market in accordance phenomena. Moreover, the hypothesis makes that does not do an investor who outperforms the market from this fate, but no luck. EMH supporters say this is by the laws of probability at a given time in a market with a large number of investors, some will excel, while others remain average. How does a market become more efficient? In order to become more efficient market, the investor must recognize that a market is not efficient, and propose possible. Ironically, investment strategies should take advantage of inefficiencies in fact the fuel that keeps a market efficiently. A market must be large and liquid. Information must be generally available and released in terms of accessibility and cost, and investors in more or less the same time. Transaction costs have to be cheaper than the expected profit s of the investment strategy. Investors also need sufficient resources to the advantage of inefficiency, until it disappears, as stated in the EMH, it again. Above all, an investor has to believe that she or he can surpass the market. Degree of efficiency: Accepting the EMH in its purest form can be difficult, but there are three identified classifications of the EMH, which have at or to which it can be applied to the markets to target. 1. Strong performance This is the strongest version, which states that all information is in a market, whether public or private, accounted for a share. Not even insider information could allow an investor an advantage. 2. Semi-strong efficiency This form of the EMH implies that all public information in the current share price a stocks price is calculated. Neither fundamental nor technical analysis can be used to achieve superior returns. 3. Poor performance this type of EMH asserts that all previous prices are for one shares down on todays stock price. Therefore, the technical analysis can not be used to predict and beat a market. Executive Summary: The markets are not perfect, but pretty hard! Research and the idea of market efficiency have come a long way in the past 30 years. Many of the irregularities could take the result of measurement errors and lack of time to different risks and returns and the cost of information.   Ãƒâ€šÃƒâ€š Basic idea of market efficiency is that the competition all the information in the price drive fast. This idea has its start, at least in part by the ball and in 1968 Browns discussion paper in earnings announcements. The authors found that 80% of the market was news before the announcement and the projected 3 a.m. to 6 p.m.-month returns following the announcement of nearly zero. Of course, following Fama, French, Jensen and Roll 1969 dividend divided paper (FFJR), the first real event was study, the researchers found a regular market very efficiently. These papers helped to remove the generally prevailing opinion that the market prices were estimated not to be trusted completely as a means of scientific research used. The more theoretical models of Modigliani and Miller, Sharpe and Lintner (CAPM) and Black and Scholes (1973) contributed to the idea that the markets were efficient support to win. (The other models are more credibility to the event-study results.) Fama first defines the term efficient market in financial literature in 1965, maximized as a market with a large number of profit , with each trying to predict future market values and information is almost freely available. Ball in 1969 FFJR paper describes the introduction of event time as the event that even the most important breakthrough in our understanding of how stock prices react to new information may have been. Ball without support while the efficiency of the market to recognize several limitations, streamed into the day as a researcher in search of anomalies were detected. Ball shares the research into three overlapping groups Empirical Anomalies: Problems with the installation of the theory to the data price overreactions (eg Debont and Thaler 1985), excess volatility (Shiller 1981), In response to good earning potential announcements, CAPM, seasonal patterns Errors in the efficiency as a model of exchange. (This is perhaps the strongest part of the paper) The basic idea is that we have information on the funding to zero when they are in fact positive. Everyone recognizes that these costs should be included in any efficiency of search, but we do not know these costs, we assume it equal to zero. Further, even if it publish discrepancies found that the researchers, why? If this is true, no data anomalies and quirks, then why not trade on the information? Publishing ie, the usefulness of this information is not large. What we really need to know is the expected profits from production and trade on private information. Ball also makes the humorous remark that a trading strategy modeled (on past data, but with the help of modern computer and statistical methods) is similar to using a modern war, acquire technology, simulated gains in the Middle Ages. (Note: For those of you not sure about it, I suggest you to read a Connecticut Yankee in King Arthurs Court by Mark Twain). The fact that no researcher can know, abnormal profits is not surpri sing. Suppose marginal utility equals marginal cost, the marginal utility of the analyst is quite small. Ball outlines an example where the cost is for a given forecast of $ 2000. This is only a per thousand of 2 billion U.S. dollars firm. Ball also points out the obvious: certain investors (like Warren Buffet) have access to better information, and then possibly lower returns required. Ball also notes that analysts play an important role in reducing the uncertainty by reporting on what other investors are able to do and how they play on the company. Problems in Testing Efficiency as a model of the stock market This section deals with problems in assessing market efficiency Joint hypothesis problem: to study the efficiency and the model of the market Changes in risk-free interest rate and risk premiums: serial correlation can be the result of the time different prices and premiums. Changes in risk (even though the companies usually predictable seasonal or major events on Monday in December, etc.) geben. As a result, we can not say much definitive. The final section (before the conclusion) asks Is behavioral finance is the answer? Ball answered his own question with a negative. He holds that position, because (as Fama) he believes that the school has its own Behavorialist anomalies and grossly inconsistent with competitive markets. Ball concludes his paper with the words the theory of efficient markets, like all theories, an imperfect and limited view of equity markets. The issue is not resolved conclusively, while there are so many mandatory restrictions on the asset pricing models are based on empirical tests of market efficiency. Further, he says that he by the transformation of the form has advantages EMH considers lived securities markets, and [he] is still responding, how good the prices to information to what impressed thirty years ago to be expected. Theory: Innovation and growth are the only ways to company survival and prosperity. Consistently meet and exceed customer expectations requires intensive efforts to minimize process variation promoted through creative thinking. It must be remembered that creative thinking involves risk of errors, as do all methods of experimentation cry for freedom from the accepted way of things. Reverse engineering to identify redundancy Roots: On the same implementation of Six Sigma techniques that are so successful, have the potential to lead to his dismissal. The normal tendency of a newcomer to Six Sigma implementation will be the Six Sigma principles to reduce everything and anything for the variability, but adds the additional unproductive to waste because of unplanned activities. The techniques involved in the implementation are the places to look for the causes of errors. Although this is a typical range for Six Sigma with several trials and failures for many years in a company, it can throw some insight into the root of error generators. The foll owing is a partial list of areas that you must pay attention to: Project selection Statistical Process Control Assessment of the measuring system Analysis of variance using ANOVA Failure modes and effects analysis (FMEA) The need to provide documentation in the reaction with the same approach and reiterated zeal can no longer emphasized. We may not get the impression that redundancy analysis is a kind of test of Six Sigma. But the fact of the matter is that checks and balances will be treated as an integrated DMAIC phases or DMADV. Redundancy by resistance to change: Resistance to change is considered one of the most important areas of analysis for redundancy factor. A black belt does not need to construct these changes as a notional resistance, as most modern organizations have efficient ways of producing desired results with appropriate inputs. The mere suggestion of process changes were a risk, considered as contrary to their long-established paths. Second , the departments such as finance and materials management are not in a position, results of Six Sigma deployment as quickly as the other departments within the company to see how the production. Means of redundancy analysis: There are no special tools for the analysis of redundant) implementation of Six Sigma, although some practitioners recite TRIZ (Russian acronym for Theory of Inventive Problem Solving to identify redundancies. However, just as a rule, the same tools used to implement useful, even in this case. The procedure, carried out after the instruments error generators prior to the implementation should be repeated to expose this error. Analytical and statistical tools in marked contrast pre-and post-data with extreme precision. The mindset of redundancy Analyst: It helps an in-house man for the analysis of layoffs. An experienced person with a long inside the organization has some advantages, which start with. It is important to understand that resistance to change is mainly due to the inertia and what it takes to the ice with a heavy reliance on formal mechanisms of cutting through the right display the entire image. One must be careful to fall victim to when redoing frustrations with statistical analysis to avoid facing. The only thing the redundancy analyst must keep in mind, above all, that kills any wastage of profitability. Conclusion: EMH propagandists will find that profit-seekers to use in practice, which is unusual so far, until it disappears. In cases such as the January effect (a predictable pattern) of a price movement, large transactions costs are likely to take advantage of attempting to outweigh the advantage of such a trend is increasing. In the real world, markets can not be efficiently or inefficiently. It might make sense, the markets are essentially a mixture of both to see where daily decisions and events are not always immediately in a market-expression. When all participants were to believe that the mark et is efficient, would anyone looking for extraordinary profits, which holds the power to the wheels of the market is turning. In this age of information technology (IT), but markets around the world gain greater efficiency. It allows a more effective, faster means to disseminate information, and electronic trade can be to adjust the prices to go faster on news in the market. However, while the pace at which information we receive and accelerated execution of transactions, IT reduces the time it uses the information to validate a trade. It may inadvertently result in less efficiency if the quality of the information that we no longer use, it allows us to profit-generating decisions. Literature: Article (Managerial Finance (1994 Volume 30 Issue 2 / 3)) Accounting and Finance by Peter Atrill and Eddie McLaney (fourth edition) www-resources: https://www.financeprofessor.com/ https://www.streetdirectory.com