Efficient Markets hyphotesis Essay Example | Topics and Well Written Essays - 2000 words

Efficient Markets hyphotesis - Essay Example This simple concept has remarkable repercussions for the financial markets and investors alike. In this paper we will talk about the efficient market hypothesis in great detail with reference to technical and fundamental analysis. We will talk about market efficiency and types of market efficiencies. The concepts of ‘random walk’ and ‘fair game model’ will also be discussed. In the end test and studies conducted to prove the efficient market hypothesis will be presented alongside with the conclusion. The efficient market hypothesis proposes that assets in financial markets are priced after taking all the public information available into account. This means that people might not be able to earn abnormal profit consistently for a long period of time. Efficient market hypothesis entails that investors cannot earn more than the average market returns by taking similar risk exposure as the market. This hypothesis therefore suggests that markets are efficient inf ormation wise and all the public information about an asset is perfectly reflected in the market. An obvious consequence of efficient market hypothesis, if accepted, is that markets always go towards equilibrium and this in turn means that financial markets are rational in general. Critics of efficient market hypothesis tend to dispute the ‘rationality of the markets’ as they feel that this hypothesis is not able to explain market crashes (Fox, 2009). If market is overall rational then all investors should immediately.