MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 3.2
The Efficient Market Hypothesis
This hypothesis states that the capital market is efficient in processing information. An efficient capital market is one in which security prices equal their intrinsic values at all times, and where most securities are correctly priced.
The Efficient Market Hypothesis
This hypothesis states that the capital market is efficient in
processing information. An efficient capital market is one in which security
prices equal their intrinsic values at all times, and where most securities are
correctly priced. The concept of an efficient capital market has been one of
the dominant themes in academic literature since the 1960s.
The efficient market model is actually concerned with the speed
with which information is incorporated into security prices. The technicians
believe that past price sequence contains information about the future price
movements because they believe that information is slowly incorporated in
security prices. This gives technicians an opportunity to earn excess returns
by studying the patterns in price movements and trading accordingly.
Fundamentalists believe that it may take several days or weeks
before investors can fully assess the impact of new information. As a
consequence, the price may be volatile for a number of days before it adjusts
to a new level. This provides an opportunity to the analyst who has superior
analytical skills to earn excess returns.
The efficient market theory holds the view that in an efficient
market, new information is processed and evaluated as it arrives and prices
instantaneously adjust to new and correct levels. Consequently, an investor
cannot consistently earn excess returns by undertaking fundamental analysis or
technical analysis.
