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Business & Marketing
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Topic:

Efficient market hypothesis (Essay Sample)

Instructions:

Differentiate between the various types of efficient market hypothesis.

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Content:

DIFFERENTIATING THE VARIOUS FORMS OF EFFICIENT MARKET HYPOTHESIS
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The efficient market hypothesis evolved in 1960 from Eugene Fama in his PhD dissertation. (Fama, 1965) Fama strongly asserted that in a market with rational, intelligent and well-informed investors, the pricing of securities will be based on all the available information. The efficient market hypothesis (EMH) is interpreted in three forms; the weak form, the semi-strong form and the strong form. The weak form asserts that the prices of securities reflect the historical market prices and data. The semi-strong form asserts that security prices reflect all publicly available information, that is, historical and current information. The strong form asserts that all information is fully reflected in security prices including private or insider information. (Fama, 1965)
The various forms of efficient market hypothesis can be differentiated using the amount of information available for the pricing of the securities. The weak form points out that the prices of securities reflect the past market data. These include past prices and past volume of trade. These waivers the need for technical analysis as there would be no use of predicting future price changes. The semi-strong form points out that all publicly available information, both historical and current is reflected in security prices. Fundamental analysis is thus not required. Corporate and event announcement is swift and is readily adopted in the pricing of securities. In the strong form, the pricing of securities relies on historical, current and private or insider information. Insiders cannot gain profits from insider information unknown to the public in the strong form. (Higgins, 2008)
The above three forms of market efficiency sugges...
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