Friday, August 23, 2019

Features of Efficient Market Hypothesis Essay Example | Topics and Well Written Essays - 1000 words

Features of Efficient Market Hypothesis - Essay Example As a result one cannot earn returns over and above the average return of the market provided that the information is available when invested. The following are the underlying assumptions of efficient market hypothesis. The ‘weak form’ of the efficient market hypothesis identifies prices of tradable assets like stocks, property and bonds etc, which reflect all information that was available to the public in the past. In other words, say for example, the past prices of stock A is reflected in its current stock price. The ‘strong form’ of the efficient market hypothesis is the strongest form of efficiency of financial markets. It is of the view that information, public or private in nature, is reflected through the stock prices, in the market. Thus even insider information cannot put the investor in an advantageous position (Fama, 1970, p.383). As already discussed the efficient market hypothesis makes the assertion that asset prices reflect all the information available in the market. Now we shall explain as to why it is not able to adequately explain asset pricing with respect to debt and equity. The efficient market hypothesis is the right platform to start when one is thinking of asset price formation. However evidences have suggested that it has been unable to explain some features of market behaviour. The market prices at times are subjected to misalignments which can exist for a prolonged period of time (Fama, 1991, p.8). The random walk model is one of the versions of efficient market.

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