Essay on "Implications of the Efficient Market Hypothesis"

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The article that was written by Fema (1991), talks about the effectiveness of the EMH through: conducting a literature review of the most relevant information since the 1970s. As they are looking at a number of different areas to include: short horizon returns, long horizon returns and contrarian viewpoint. The results were that various returns were predictable using a number of different tools to include: dividend yields, E / P ratios and default spreads on junk bonds. This is important, because it showing how other factors can be used, to highlight how the EMH is not always reflecting all available information. (Fema 1991) the author is a professor at the University of Chicago Graduate School of Business.

In the article that was written by Schiller (2003), it discusses the how the EMH has weaknesses of: misinterpreting major events and relative valuations are hard to determine over the course of time. This is important, because it shows how the EMH has a number of flaws that can lead to major mistakes. As a result, more research needs to be conducted to highlight the overall strengths and weaknesses of this theory. Once this occurs, it will provide the greatest insights as to how effective it is at analyzing equity prices. (Schiller 2003) the author is a professor at Yale University and is a research associate for the National Bureau of Economic Research.

In the article that was written by Jaffe (1976), it talks about how the securities markets are efficient at being able to: identify all relevant information surrounding future stock prices. As they have identified a special model and information that can help sophisticated traders. As this theory can be used along with the pricing model; to find, better trading opportunities through the market maker. The market maker uses the differences between the bid and ask (also known as the spread) to be able to increase the overall return. As a result, the EMH can be used in conjunction with various trading irregularities to identify unique trading opportunities. In this aspect, the author believes this can provide above average returns in conjunction with the models he has identified. This is important, because it is showing how the EMH is providing a way to see new trading opportunities. The authors working on the study were from the University of Indiana and the University of Pennsylvania. (Jaffe 1976)

In the article that was written by Fema (n.d.), it discusses the EMH through a series of different tests that were being conducted. These include: weak form tests, semi-strong form tests and strong form tests. After conducting these different tests by: using a variety of mathematical formulas, researchers determined that the EMH is the most accurate theory surrounding the equity markets. At the same time, they found that trying to scientifically disprove this idea is challenging. as, it exists to: a certain extent at every level on the markets, reflecting these different views. The author is a professor at the University of Chicago Graduate School of Business. (Fema n.d.)

In the article that was written by Basu (1977) it talks about if the EMH can predict the movement of the stock market. as, its ideas are compared to using various valuation tools from: fundamental analysis (most notably PE ratios), to identify stocks that are oversold. The results were that stocks with low PE ratios outperformed the market averages (indicating some kind of anomaly). While, socks that were trading at higher valuations tend to follow the major market averages. This is important, because it is showing how the EMH can identify certain general trends inside the market. However, there are times when stocks will become oversold; which improves the overall return. The authors for this article all are affiliated with the Cornell School of Business. (Basu 1977)

In the article that was written by McDonald (1987) it discusses the impact of the EMH on the currency markets. This is conducted by studying the movements of the Singapore dollar between 1978 and 1983. The results were that there was a correlation between the movements of the currency and various announcements from the Singapore Monetary Authority. This is important, because it shows how the EMH is already factored in by traders and investors. The authors are professors at the Department of Political Economy at the University of Aberdeen. (McDonald 1987)

In the article that was written by Jensen (1978), it talks about how the EMH has often been relied on as one way to understand what is happening in the market. Yet, beneath the surface it is unable to explain all of the different movements that were taking place. To answer these different questions, researchers began to study the markets in comparison with unplanned events. The results were that the EMH is beginning to have a disconnect, with the theory, unable to identify when changes were taking place. This is important, because it shows how the widespread acceptance of this theory has caused various inaccuracies to occur. The author is a professor of Business and Economics at Harvard University (Jensen 1987)

In the article that was written by Bont (1985), it examines the overall impact the EMH can have in determining various movements of the markets. The results were that when the markets are overacting the EMH has been proven to be incorrect. At the same time, they found that various seasonal factors such as the January effect could provide above average returns. This is important, because it is showing how the EMH can miss critical changes that are taking place in the markets. (Bont 1985) the author is a professor of Economics at Stanford University. (Bont 1985)

The article that was written by LeRoy (2010), discusses how the EMH has been often cited as way of understanding the markets. Yet, when you look beneath the surface a number of different factors could have an impact upon the how effective it is. The most notable include a lack of comparative analysis over: long periods of time and making too many assumptions. This information is important, because it is showing how this could have an impact upon the EMH, understanding all relevant information. The author is an economist with the Brooking Institute and author. (LeRoy 2010)

The article that was written by Maskin (1990), talks about how the markets are efficiently analyzing all available information. This has limited the overall return that most shareholders are receiving. As a result, many have begun to focus on finding better returns through insider trading. This is important, because it shows how the EMH is able to understand the overall shifts that are occurring in the market. As traders and investors will seek out other ways of obtaining information before it is released to the public. The author is a professor at Harvard University. (Maskin 1990)

The article that was written by Chen (2001), discusses the EMH and random expectations hypothesis. The results were that after analyzing both in comparisons with other factors. Researchers were able to show, how they can reflect the different attitudes and ideas that many people will have about the markets going forward. This is important, because it shows how the EMH can provide accurate assessments, as to if an underlying assets class has become risky. The author is a researcher and scholar at the Institute for Economics in Taiwan. (Chen 2001)

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