Efficient Market Hypothesis
The Efficient Market Hypothesis (EMH) holds that in an open and efficient market, security prices fully reflect all available information and prices rapidly adjust to any new information. Fama first defined the term “efficient market” in financial literature in 1965.
As a core theory to research efficient market, EMH still is a perfect assumption. There are two assumptions that must satisfy if EMH is established. The one is rational agent assumption. It says that all investors are the pursuit of individual utility maximization rational man, having the same understanding and the ability to analyze information. And the forecasts of stock prices are the same. Another assumption is that Random Walk Theory. In an efficient market, it is only when new information becomes available that significant changes in security prices will occur. Means stock price movements do not follow any pattern or trend. By definition, new information is currently unknown and occurs at random, so future price movements in securities are unknown and occur at random too. This means price movements ‘wander’ in a random walk.
Here are the three forms of the Efficient Market Hypothesis.
◆Weak-form EMH
It says current prices reflecting all publicly available historic price information; trading rules based on past stock market return or volume are futile. It can’t profit by looking at past trends. A recent decline is no reason to think stocks will go up (or down) in the future. It means that it will not be possible t o use ‘technical analysis’.
◆Semi-strong Form EMH
It says current prices reflect all publicly available information, including past prices, but additionally information contained in in a company’s report and accounts, stock market announcements and other known economic conditions; trading rules based on public information are futile.
◆Strong Form EMH
It says current prices reflect all public information and non-public information. All information include private information which is normally only held by corporate insiders, such as company executives and their advisers. All trading rules are futile.
The Efficient Market Hypothesis used to be widely accepted amongst investors. However, the rise of behavioral economics, which
argued that markets fell short in terms of how they processed information and other psychological factors should be taken into account by investors, in addition to the Efficient Market Hypothesis.
The financial theory think that Emphasizing the perfectly rational of investors do not conform to the actual. Many investors didn't have the energy and the ability to collect large amounts of information processing. There are a lot of asymmetry information on the market. Flemins proved that Even if the investment institutions detect the irrational rise in the market.But over a period of time, rational investment strategy is to follow chasing after go up, and tried to sell before others. This theory is supported by empirical data. And economists found that There are not only a lot of Noise Deal, but also the market effect and influence is very big. So it have a great impact on EMH. Another question, EMH thought that arbitrage is no limits. Financial markets will not deviate from their fundamental value. But it’s a question that whether Financial market fully rational arbitrageurs is worth considering. Arbitrageurs behavior risks tend to ignore the noise traders. In addition, arbitrage mechanism if can be done, the key is to find effective arbitrage of stock replacement. But in most cases, securities market cannot provide appropriate alternative. So Arbitrage is a risky process. It’s effectiveness is limited.
So we say that markets are not always ffective. The efficient market is always an ideal state of hypothesis. Whether the market is effective or ineffective, we are participants of the market, and what we need to do is to grasp the rhythm of the market. When market is in a state of equilibrium effectively, we can drive take negative conservative investment strategy. When the market shows invalid state, we should take active investment strategy.
参考文献：
1.董志勇《行为经济学》北京大学出版社
2.特维德《金融心理学》财信出版。