Earnings Process And Efficient Markets Essay

Capital markets provide a function which facilitates the buying and selling of long-term financial securities to increase liquidity and their value, Watson & Head (2013). Hence, the Efficient Market Hypothesis (EMH) explains the relationship that exists with the prices of the capital market securities, where no individual can beat the market by regularly buying securities at a lower price than it should be. This means that in order to be an efficient market prices of securities will have to fairly and fully reflect all available information, Fama (1970). Consequently, Watson & Head (2013) believe that market efficiency refers to the speed and quality of how share price adjusts to new information. Nevertheless, the testing of the efficient markets has led to the recognition of three different forms of efficiency in which explains how information available is used within the market. In this essay, the EMH will be analysed; testing of EMH will show that the model does provide strong evidence to explain share behaviour but also anomalies will be discussed that refutes the EMH. Therefore, a judgment will be made to see which structure explains the efficient market and whether there are some implications with the EMH, as a whole.

It is believed that Efficient Market Theory is based upon some fallacies and it does not provide strong grounds of whatever that it proposes. More importantly the Efficient Market theory is perceived to be too subjective in its definition and details and because of this it is close to impossible to accommodate this theory into a meaningful and explicit financial model that can actually assist investors in making the investment decisions (Andresso-O’Callaghan, B., 2007).

S. Basu (1997) tested for the information content of price-earnings multiple. He tested to see whether low P/E stocks outperform stocks with high P/E ratios. If historical P/E ratios provided useful information for obtaining higher stock returns then it would be refutation of semi strong form of efficient market hypothesis. His results indicated that low P/E portfolios provided superior returns relative to the market and high P/E provided inferior returns relative to the market. The results reported in this paper indicate that P/E ratio information was not fully

When establishing financial prices, the market is usually deemed to be well-versed and clever. In a stock market, stocks are based on the information given and should be priced at the accurate level. In the past, this was supposed to be guaranteed by the accessibility of sufficient information from investors. However, as new information is given the prices would shift. “Free markets, so the hypothesis goes, could only be inefficient if investors ignored price sensitive data. Whoever used this data could make large profits and the market would readjust becoming efficient once again” (McMinn, 2007, ¶ 1). This paper will identify the different forms of EMH, sources supporting and refuting the EMH and finally

Efficient Market Hypothesis has been controversial issues among researcher for decades. Until now, there is no united conclusion whether capital markets are efficiency or not. In 1960s, Fama (1970) believed that market is very efficient despite there are some trivial contradicted tests. Until recently, both empirical and theatrical efficient market hypothesis was being disputed by behavior finance economist. They have found that investor have psychological biases and found evidences that some stocks outperform other stocks. Moreover, there are evidences prove that market are not efficient for instance financial crisis, stock market bubble, and some investor can earn abnormal return which happening regularly in stock markets all over the world. Therefore, the purpose of this essay is to demonstrate that Efficient Market Hypothesis in stock (capital) markets does not exist in the real world by proofing four outstanding unrealistic conditions that make market efficient: information is widely available and cost-free, investor are rational, independent and unbiased, There is no liquidity problem in stock market, and finally stock prices has no pattern.

Last but not least important, an efficient capital market is one in which stock prices fully reflect all available information. However, the paradox is that since information is reflected in security prices quickly, knowing information when it is released does an investor little good. Furthermore, it is impossible to create a portfolio which would earn extraordinary risk adjusted return. As a consequence, all the technical and fundamental analysis are useless, no one can consistently outperform the market, and new

When we invest money into the stock market we do it with the intention of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform, or ‘beat the market’. However, market efficiency - championed in the efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, suggests that security prices instantly and fully reflect all available information and that it would not be possible for an investor to make consistent excess profits. When new information

The efficient market hypothesis is constantly being analyzed for its validity in the current market. There are a multitude of external factors contributing to the reluctance of relying on the EMH. Specifically, the rise of high frequency trading has significantly called into question the legitimacy of the efficient

Fama (1970) stated that a stock market is considered efficiency when the security prices are fully incorporated and reflect the relevant and available information. However, how the market is evaluated as efficient as supposed? Indeed, the “efficient market” is called so when it will not enable investors to earn more than the average returns if they do not accept risks higher then average risk. Therefore, believing in Efficient Market Hypothesis Theory means that the attempt either to search for undervalued stocks or to predict and

The efficient market hypothesis is constantly being analyzed for its validity in the current market. There are a multitude of external factors contributing to the reluctance of relying on the EMH. Specifically, the rise of high frequency trading has significantly called into question the legitimacy of the efficient market. High

Ever since Fama (1970) developed the Efficient Market Hypothesis (EMH) and defined the market efficiency as the strength to fully reveal all available information on the asset prices, there has been endless discussions around this hypothesis. As no arbitrage is implied, multiple theories are introduced to explore arbitrage activities and their limitations. Stephen Ross once said: “To make a parrot into a learned financial economist it needs to learn just one word – arbitrage.” Under the Efficient Market Hypothesis, there should be no trading techniques that yield positive, expected, risk-adjusted excess returns (Dothan, 2008), which in turn suggests the absence of arbitrage opportunity. Sharpe and Alexander (1990) defined arbitrage as the act to buy and sell the equivalent, or fundamentally comparable, security in two different markets at the same time to benefit from their price difference. Arbitrageurs normally look for mispriced securities and make profit through opposite positions. They long undervalued stocks and short overvalued stocks, creating upward and downward pressures on security prices towards their fundamental values.

To begin with, in this paper, we assume the impact is unbiased, which means this market is efficient. In an efficient market, the market price should be an unbiased estimate of the true value of the stock. However, market efficiency does not require the price to be completely matched with true value. Due to randomness, the price can either be under-estimated or over-estimated at any point of time. When there is an announcement, the changing of prices related to the announcement does not mean the market is inefficient. Martingale property theory assumes that knowledge of past events cannot help to predict future winning’s stock price. Only when this condition is satisfied, then the market is a fair game. There are three versions of efficient market hypothesis: weak-form efficiency (contains all past price information), semi-strong efficiency (contains all public information), and strong efficiency (contains all public and insider information). The better the price signal, the more info-efficient the market. Event studies provide a direct test to market efficiency.

Stock market trading is an application domain with a big potential for data mining. In effect, the existence of an enormous amount of historical data suggests that data mining can provide a competitive advantage over human inspection of this data. On the other hand there are authors claiming that the markets adapt so rapidly in terms of price adjustments that there is no space to obtain profits in a consistent way. This is usually known as the efficient markets hypothesis. This theory has been successively replaced by more relaxed versions that leave some space for trading opportunities.

Academics noticed flaws with the efficient market theory paying attention to the volatile stock price abnormality. Despite these anomalies appearing minor in nature, it

This paper will discuss the nature of security market efficiency and then an application of understanding of stock market bubbles to a particular company. It will also develop and demonstrate an understanding of the topic area of capital market efficiency as well as apply theoretical understanding to the analysis of market information in the context of a company listed on the Shanghai Stock Exchange (SSE). It will illustrate the information on distance from the assumption that financial markets perform well and price changes constantly demonstrate real data. Furthermore, this paper will also illustrate what episodes of volatile security price behavior mean for the notion that security markets work efficiently. On the other hand, the main reason of this paper is to prepare a critical literature review of the competing views that stock market bubbles undermine confidence in the Efficient Market Hypothesis. This will investigate the movements of the share price of Shenergy Ltd and of the Shanghai Stock Exchange Composite Index generally in the light of information available to investors. Moreover, it will also define the actions and circumstances which may be related to share price movements and what has influenced share prices on the SSE over this time. This means, this will explain regarding the share price behavior that have been observed and confirms by any of the academic views encountered in literature review.