What Is the Efficient-Market Hypothesis?

The Efficient Markets Hypothesis (EMH) was proposed and deepened by Eugene Fama in 1970. The "efficient market hypothesis" originated in the early 20th century. The founder of this hypothesis was a French mathematician named Louis Bachelier. He applied statistical analysis to the analysis of stock returns and found that The mathematical expectation of its fluctuation is always zero.

Efficient market hypothesis

Human understanding of stock market volatility is a very challenging world-class problem. So far, no theory or method can be convincing and stand the test of time. In 2000, a famous economist
1964
internal
First, everyone in the market is a rational economist, and the companies represented by each stock in the financial market are in these
Weak Form Efficiency
This hypothesis holds that under weakly valid conditions, the market price has fully reflected all past historical securities price information, including stock prices.
Weak-form valid hypothesis test
Test principle:
Fractal was first proposed by Benoit Mandelbort to describe the irregular, broken, trivial geometric features. Li Ya
1. All investors, including experts, are subject to the influence of psychological bias, and institutional investors may also be irrational.
2. Investors can make a profit by taking action before most investors realize the mistake.
The purpose of behavioral finance research: to determine the conditions under which investors will over- or under-react to new information.
3. Investors can take advantage of people's psychological deviations to make long-term profits.
In the information age, make money by mastering more information.
Comparison of fractal market theory and efficient market theory
Efficient market theory
Fractal market theory
Market characteristics
Linear isolated system
Non-linear, open, dissipative systems
Equilibrium
balanced
Allow disequilibrium
System complexity
Simple system
Complex system with fractal, chaos, etc.
Feedback mechanism
No feedback
Positive feedback
Response to information
Linear causality
Nonlinear causality
Income sequence
White noise is not relevant
Fractional Noise Long Memory (Sensitive to Initial Value)
Price series
Brownian motion (H = 0.5)
Fractional Brownian motion (H (0.5, 1))
Predictability
not predictable
Provides a new way to predict
Volatility order
Disorder
Orderly
Relationship between the two
Efficient market is a special case of fractal market. Fractal market expands the meaning of effective market. Fractal market theory characterizes the market more extensively and accurately.

Efficient market hypothesis

Investors are not completely rational. Fischer and Black (1986) point out that investors buy on the basis of "noise" rather than information.
Investors do not just stray from reason, but often stray from it in the same way. The "investor mindset" theory in behavioral finance discusses the fact that a large number of investors make the same mistakes in judgment, and their errors are related.
(3) Arbitrageurs will not completely eliminate the impact of irrational investors' errors on prices. In most cases there is no suitable substitute for securities. Even if a complete alternative can be found, arbitrageurs face other risks, such as the noise trade riskunpredictable prices in the future

Empirical evidence of efficient market hypothesis

I. Challenges to weak efficient markets
De Bondt and Thaler (1985) found long-term reversal effects.
EgJegadeesh, Titman (1993) found the "momentum effect".
January effect
Challenges to Semi-Strong Effective Markets
Small-scale effect, p / e effect, pb effect.
Overreaction visions: IPOs-Ritter (1991), Loughran & Ritter (1995); SEOs-Loughran & Ritter (1995), Spiess & Affeck-Graves (1995); New exchanges listings-Dharan & Ikenberry (1995 ).
Anomalies of insufficient response: Post-announcement Drift-Ball & Brown (1968), Bernard & Thomas (1990); Spinoffs-Cusatis et al. (1993); Stock splits-Desai & Jain (1997), Ikenberry et al. (1996); Share tenders-Vermaelen (1990); Open-market share repurchases-Ikenberry et al. (1995); Dividend omissions and initiations-Michaely et al. (1995).
It is impossible to distinguish between overreaction and underreaction vision: Mergers (acquring firm)-Asquith (1983), Agrawal et al. (1992); Proxy contests-Ikenberry & Lakonishok (1993).
3. The challenge of no response to news vacuum but stock price:
Cutler et al (1991) The stock prices of the 50 companies with the largest fluctuations in the US stock market on the day after the war. Many did not have any significant news changes.
Roll (1994, 1998) two studies show that it is the unexpected shock rather than the news that causes stock price volatility

Characteristics of the efficient market hypothesis

phenomenon
The existence of these phenomena shows that investors have the premise available, that is, it is possible to obtain excess profits. Efficient market hypothesis
The discussion of related phenomena and the results of empirical research form the basis of the current popular "Behavioral Finance".
defect
The capital market as a complex system is not as harmonious, orderly, and hierarchical as described by the efficient market hypothesis. For example, the Effective Market Hypothesis (EMH) does not consider the liquidity of the market, but assumes that prices can always be fair regardless of whether there is sufficient liquidity. Therefore, EMH cannot explain the market panic and the stock market crash, because in these cases, it is more important to complete the transaction at any price than to pursue a fair price.

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