EFFICIENT MARKET HYPOTHESIS

I dare to write on this topic as it is the most intense and debatable topic in the financial markets over the years.

As recently the author of “Fooled by Randomness” and “The Black SwanNassim Taleb became the anti-theorist in finance arguing that the Nobel committee should be sued for awarding Harry Markowitz, Bill Sharpe and Merton Miller http://www.bloomberg.com/news/2010-10-08/taleb-says-crisis-makes-nobel-panel-liable-for-legitimizing-economists.html

But the Guru of Corporate finance Aswath Damodaran did a posting replying to him on the market efficiency models. http://aswathdamodaran.blogspot.com/2010/10/nassim-taleb-and-nobel-committee.html

The most efficient market model is distinctive provided by Eugene Fama he defines:

A market is efficient with respect to a particular set of information if it is impossible to make abnormal profits (other by chance) by using this set of information on to formulate buying and selling decisions.

All the government policies encourages the establishment of efficient markets in the world but certainly the developed market came in to question mark in the last 2 years crisis and catastrophe lead to contagion.

According to Eugene Fama:

An investor in the efficient market should expect to make only normal profits by earning a normal rate of return on the investments.

Weak form of efficient market: If it is impossible to make abnormal profits (other by chance) by using    past prices to formulate buying and selling decisions.

Semi strong form of efficient market: If it is impossible to make abnormal profits (other by chance) by using publically available information to formulate buying and selling decisions

Strong form of efficient market: If it is impossible to make abnormal profits (other by chance) by using any information whatsoever to make buying and selling decisions.

4 thoughts on “EFFICIENT MARKET HYPOTHESIS

    1. Thanks Jasmina for leaving the link !! But I believe the financial community is just try to ignore the important theory.. I always think its an interesting hypothesis to consider – I seem to recall Fama saying that it’s a hypothesis and shows how the markets could behave – not how they universally will – This point may have been lost on some of the financial community – I always feel that the value of a hypothesis gets lost when it gets taken to the level of a zealot and the argument over them raises to a level that it is no longer constructive.

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