The Efficient Market Hypothesis and Its Critics

Revolutions often spawn counterrevolutions and the efficient market hypothesis in finance is no exception. The intellectual dominance of the efficient-market revolution has more been challenged by economists who stress psychological and behavorial elements of stock-price determination and by econometricians who argue that stock returns are, to a considerable extent, predictable. This survey examines the attacks on the efficient market hypothesis and the relationship between predictability and efficiency. I conclude that our stock markets are more efficient and less predictable than many recent academic papers would have us believe.

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THE EFFICIENT MARKET HYPOTHESIS REVISITED: EVIDENCE FROM THE FIVE SMALL OPEN ASEAN STOCK MARKETS

The Singapore Economic Review ◽

10.1142/s021759081250021x ◽

2012 ◽

Vol 57 (03) ◽

pp. 1250021 ◽

Cited By ~ 3

Author(s):

QAISER MUNIR ◽

KOK SOOK CHING ◽

FUMITAKA FUROUKA ◽

KASIM MANSUR

Keyword(s):

Stock Returns ◽

Unit Root ◽

Stock Prices ◽

Stock Price ◽

Efficient Market Hypothesis ◽

Linear Series ◽

Efficient Market ◽

Threshold Autoregressive ◽

Non Linear ◽

Unit Root Process

The efficient market hypothesis (EMH), which suggests that returns of a stock market are unpredictable from historical price changes, is satisfied when stock prices are characterized by a random walk (unit root) process. A finding of unit root implies that stock returns cannot be predicted. This paper investigates the stock prices behavior of five ASEAN (Association of Southeast Asian Nations) countries i.e., Indonesia, Malaysia, Philippines, Singapore and Thailand, for the period from 1990:1 to 2009:1 using a two-regime threshold autoregressive (TAR) approach which allows testing nonlinearity and non-stationarity simultaneously. Among the main findings, our results indicate that stock prices of Malaysia and Thailand are a non-linear series and are characterized by a unit root process, consistent with the EMH. Furthermore, we find that stock prices of Indonesia, Philippines and Singapore follow a non-linear series, however, stock price indices are stationary processes that are inconsistent with the EMH.

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Testing Semi-strong Form Efficiency of Stock Market

The Pakistan Development Review ◽

10.30541/v40i4iipp.651-674 ◽

2001 ◽

Vol 40 (4II) ◽

pp. 651-674 ◽

Cited By ~ 1

Author(s):

Salman Syed Ali ◽

Khalid Mustafa

Keyword(s):

Stock Returns ◽

Stock Prices ◽

Stock Markets ◽

Efficient Market Hypothesis ◽

Seasonal Effects ◽

Efficient Market ◽

New Information ◽

Empirical Regularities ◽

Day Of The Week ◽

Stock Traders

The efficient market hypothesis suggests that stock markets are “informationally efficient”. That is, any new information relevant to the market is spontaneously reflected in the stock prices. A consequence of this hypothesis is that past prices cannot have any predictive power for future prices once the current prices have been used as an explanatory variable. In other words the change in future prices depends only on arrival of new information that was unpredictable today hence it is based on surprise information. Another consequence of this hypothesis is that arbitrage opportunities are wiped out instantaneously. Empirical tests of the efficient market hypothesis actually test for these consequences in various ways. Some of them have been summarised in earlier chapters. These tests generally could not conclusively accept the random-walk hypothesis of stock returns even when GARCH effects were accounted for. Many studies have found empirical regularities that are contrary to the efficient market hypothesis. For example, the monthly, weekly and daily returns on stocks tend to exhibit discernable patterns, such as seasonal affects, month of the year affect, day of the week affect, hourly affect etc. In case of Pakistan’s stock markets too such affects are identified. Such as the Ramadan affect [see Hussain and Uppal (1999)], seasonal effects and day of the week affect. Further, the wide spread use of “technical analysis” among stock traders and their ability to predict to some extent the direction of movements in the prices of individual stocks over medium term testifies to the existence of patterns and seasonal trends.

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An Empirical Study on Efficient Market Hypothesis with reference to FMCG Sector

GIS Business ◽

10.26643/gis.v15i1.17895 ◽

2020 ◽

Vol 15 (1) ◽

pp. 109-126

Author(s):

Nitin Tanted ◽

Prashant Mistry

Keyword(s):

Stock Prices ◽

Stock Price ◽

Abnormal Returns ◽

Weak Form ◽

Efficient Market Hypothesis ◽

Controversial Issues ◽

Efficient Market ◽

Price Movements ◽

Run Test ◽

Stock Price Movements

One of the highly controversial issues in the area of finance is “Efficient Market Hypothesis”. Efficient Market Hypothesis states that, “In an efficient market, all available price information is reflected in the stock prices and it is not possible to generate abnormal returns compared to other investors.” A lot of studies conducted previouslyto test the Efficient Market Hypothesis, confirmed the theory until recent years, when some academicians found it to be non-applicable in financial markets. According to them, it is possible to forecast the stock price movements using Technical Analysis. The results of various studies have been inconclusive and indefinite about the issue. This study attempted to test the efficiency of FMCG Sector stocks in India in its weak form. For the study, closing prices of top 10 stocks from Nifty FMCG index has been taken for the 5-year period ranging from 1st October 2014 to 30th September 2019. Wald-Wolfowitz Run test has been used to test the haphazard movements in the stock price movements. The results indicated that FMCG sector stocks does support the Efficient Market Hypothesis and exhibit efficiency in its weak form. Hence, it is not possible to accurately predict the price movements of these stocks.

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Nonlinearities and Chaos: A New Analysis of CEE Stock Markets

Mathematics ◽

10.3390/math9070707 ◽

2021 ◽

Vol 9 (7) ◽

pp. 707

Author(s):

Claudiu Tiberiu Albulescu ◽

Aviral Kumar Tiwari ◽

Phouphet Kyophilavong

Keyword(s):

Capital Markets ◽

Stock Markets ◽

Transition Period ◽

Chaotic Behavior ◽

Efficient Market Hypothesis ◽

Eastern European ◽

Price Behavior ◽

Financial Systems ◽

Efficient Market ◽

Level Of Significance

After a long transition period, the Central and Eastern European (CEE) capital markets have consolidated their place in the financial systems. However, little is known about the price behavior and efficiency of these markets. In this context, using a battery of tests for nonlinear and chaotic behavior, we look for the presence of nonlinearities and chaos in five CEE stock markets. We document, in general, the presence of nonlinearities and chaos which questions the efficient market hypothesis. However, if all tests highlight a chaotic behavior for the analyzed index returns, there are noteworthy differences between the analyzed stock markets underlined by nonlinearity tests, which question, thus, their level of significance. Moreover, the results of nonlinearity tests partially contrast the previous findings reported in the literature on the same group of stock markets, showing, thus, a change in their recent behavior, compared with the 1990s.

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Systematic illiquidity, characteristic illiquidity, and stock returns: Timeseries analysis

International Journal of ADVANCED AND APPLIED SCIENCES ◽

10.21833/ijaas.2022.02.008 ◽

2022 ◽

Vol 9 (2) ◽

pp. 72-80

Author(s):

Soltane et al. ◽

Keyword(s):

Emerging Markets ◽

Stock Returns ◽

Stock Prices ◽

Stock Price ◽

Stock Exchange ◽

Systematic Risk ◽

Timeseries Analysis ◽

The Relationship

The objective of this research is to investigate the relationship between illiquidity and stock prices on the Tunisian stock exchange. While previous researches tended to focus on one form of illiquidity to examine this relationship, our study unifies three forms of illiquidity at the same time. Indeed, we simultaneously consider illiquidity as systematic risk, as a characteristic of the market, and as a characteristic of the stock. The aggregate illiquidity of the market is the average of individual stock illiquidity. The illiquidity risk is the sensitivity of the stock price to illiquidity shocks. Shocks of market illiquidity are estimated by the innovations in the expected market illiquidity. Results show that investors on the Tunisian stock exchange do not require higher returns when they expect a rise of market illiquidity, whereas investors on U.S markets are compensated for higher expected market illiquidity. In addition, shocks of market illiquidity provoke a fall in stock prices of small caps, while large caps are not sensitive to market illiquidity shocks. This differs slightly from results based on U.S. data where illiquidity shocks reduce all stock prices but most notably those of small caps. Robustness tests validate our findings. Our results are consistent with previous studies which reported that the “zero-return” ratio predicts significantly the return-illiquidity relationship on emerging markets.

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Efficient Market Hypothesis for Islamic Capital Markets

Handbook of Research on Theory and Practice of Global Islamic Finance - Advances in Finance, Accounting, and Economics ◽

10.4018/978-1-7998-0218-1.ch027 ◽

2020 ◽

pp. 489-523

Author(s):

Hakan Altin

Keyword(s):

Stock Markets ◽

Explanatory Power ◽

Market Price ◽

Efficient Market Hypothesis ◽

Global Markets ◽

Efficient Market ◽

Share Prices ◽

Global Stock Markets ◽

Stock Share ◽

Theoretical Results

This study has two important findings firstly, the theoretical results related to the efficient market hypothesis; and secondly, the results of application. The theoretical results show that if the market price of an asset includes all the information that influences its price, then that market is an efficient market. According to the efficient market hypothesis, investors cannot earn gains above the market return. Since stock share prices are unpredictable, it is assumed that when the information that the market had already been expecting is finally announced, the stock share prices will not change. That is because this announcement does not contain any information that can change the prices. The results obtained from the application show that the existence of abnormal return is valid for Islamic Stock Markets. Therefore, the findings mediate against the efficient market hypothesis. However, when the size of abnormal returns is observed, the results are almost equal to market returns. This finding supports the efficient market hypothesis. Islamic stock markets are integrated with the world at least as much as the non-Islamic global markets are. Islamic stock markets act together with the non-Islamic global markets. The risks and returns that the Islamic and non-Islamic stock markets provide to the investors are very close to each other. In conclusion, the efficient market hypothesis maintains its explanatory power for both Islamic stock markets and non-Islamic global stock markets. Islamic markets offer new investment opportunities on a global scale.

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Weak Form Efficient Market Hypothesis Study: Evidence from Gulf Stock Markets

SSRN Electronic Journal ◽

10.2139/ssrn.2787816 ◽

2016 ◽

Author(s):

Umar Awan ◽

Muhammad Subayyal

Keyword(s):

Stock Markets ◽

Weak Form ◽

Efficient Market Hypothesis ◽

Efficient Market

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Importance of Proper Monetary Liquidity: Sustainable Development of the Housing and Stock Markets

Sustainability ◽

10.3390/su12218989 ◽

2020 ◽

Vol 12 (21) ◽

pp. 8989

Author(s):

Ming-Chu Chiang ◽

I-Chun Tsai

Keyword(s):

Stock Markets ◽

Stock Price ◽

Structural Changes ◽

Housing Price ◽

Asset Markets ◽

The United Kingdom ◽

Asymmetrical Effect ◽

Capital Transfer ◽

The Relationship ◽

Coefficient Method

In this paper, we infer that when no excess monetary liquidity exists, people tend to invest available capital in assets associated with a high return or low risk. However, when excess monetary liquidity occurs, capital may successively boost asset markets, and the stock market wealth is thus likely to spill into housing markets, resulting in bubbles in these two markets and therefore in the unsustainable development of both the housing and stock markets. This paper uses relevant data from the United Kingdom from January 1991 to March 2020 to verify whether excess monetary liquidity is a crucial factor determining the relationship between the housing and stock markets. Continuous and structural changes are found to exist between housing price and stock price returns. This paper employs the time-varying coefficient method for estimation and determines that the influence of stock price returns on housing returns is dynamic, and an asymmetrical effect can occur according to whether excess monetary liquidity exists. An excessively loose monetary policy increases asset prices and can thus easily result in a mutual rise in asset markets. By contrast, when excess monetary liquidity does not exist, capital transfer among markets can prevent autocorrelation during excessive market investment and thereby aggravate market imbalance.

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Review on Efficiency and Anomalies in Stock Markets

Economies ◽

10.3390/economies8010020 ◽

2020 ◽

Vol 8 (1) ◽

pp. 20 ◽

Cited By ~ 5

Author(s):

Kai-Yin Woo ◽

Chulin Mai ◽

Michael McAleer ◽

Wing-Keung Wong

Keyword(s):

Market Efficiency ◽

Behavioral Finance ◽

Stock Markets ◽

Stock Price ◽

Efficient Market Hypothesis ◽

Past Century ◽

Behavioral Models ◽

Market Anomalies ◽

Policy Makers ◽

Conflicting Evidence

The efficient-market hypothesis (EMH) is one of the most important economic and financial hypotheses that have been tested over the past century. Due to many abnormal phenomena and conflicting evidence, otherwise known as anomalies against EMH, some academics have questioned whether EMH is valid, and pointed out that the financial literature has substantial evidence of anomalies, so that many theories have been developed to explain some anomalies. To address the issue, this paper reviews the theory and literature on market efficiency and market anomalies. We give a brief review on market efficiency and clearly define the concept of market efficiency and the EMH. We discuss some efforts that challenge the EMH. We review different market anomalies and different theories of Behavioral Finance that could be used to explain such market anomalies. This review is useful to academics for developing cutting-edge treatments of financial theory that EMH, anomalies, and Behavioral Finance underlie. The review is also beneficial to investors for making choices of investment products and strategies that suit their risk preferences and behavioral traits predicted from behavioral models. Finally, when EMH, anomalies and Behavioral Finance are used to explain the impacts of investor behavior on stock price movements, it is invaluable to policy makers, when reviewing their policies, to avoid excessive fluctuations in stock markets.

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