Critical Analysis of Efficiency Market Hypothesis

ABSTRACT Michael Jensen writes, â€Å"There is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis.† The term ‘Efficient Market Hypothesis’ (EMH) is concerned with the behavior of prices in asset markets. It was initially applied to the stock market, but the concept was soon generalized to other asset markets. EMH has also been a subject of debate since its inception in the 1960s. INTRODUCTION This essay critically discusses’ A market is efficient with respect to a particular set of information if it†¦show more content†¦These versions differ by their notions of what is meant by the term â€Å"all available information.† The tests for each form, summarized in brief, empirically shows evidence in favor of EMH: According to Fama (1970), Weak form efficiency claims that all past prices of a stock are reflected in today s stock price. Therefore, technical analysis cannot be used to predict and beat a market. The Weak Form Tests. The test of the weak form of the EMH is generally taken to comprise of; an autocorrelation test, a runs test and filter rule test. An autocorrelation test investigates whether security returns are related through time. On the other, a runs test, for example, measures the likelihood that a series of two variables is a random occurrence. A filter rule (or trading test) is a trading rule regarding the actions to be taken when shares rise or fall in value by x%. Filter rules should not work if markets are weak form efficient. Overall, the tests highlighted, statistically tests for independence, to establish the weak-form holds, thereby invalidating strategic rules for technical analy sis, to obtainShow MoreRelatedEfficient Market Hypothesis ( Emh )1258 Words   |  6 PagesEFFICIENT MARKET HYPOTHESISName: Mamunur Rahman Introduction Efficient Market Hypothesis (EMH) is a concept that was developed in 1960 s Ph.D. dissertation that was presented by Eugene Fama. 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