Efficient-Market Hypothesis (EMH)

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MUHAMMAD SOHAIB JAVED (12021) FAHAD (10156) MUHAMMAD SHARI (10055) USAMA AJAZ (8428)) 4/4/12 ARSALAN ALI (11115)

In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.

One

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It was generally believed that the use of fundamental or technical approaches could beat the market (though technical analysis ) particular, researchers found that stock price changes (not prices themselves) followed a random walk.

In

In

1970 Fama published a review of both the theory BACKGROUNDand the evidence for the hypothesis. 4/4/12 paper extended The and refined the theory, included the

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the

EMH is much better suited for individual stocks than it is for the aggregate stock market. Research based on regression and scatter diagrams has strongly supported

micro efficient but macro inefficient

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Rational

expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. this is to say that agents' expectations equal true statistical expected values.

Equivalently,

THEORETICAL BACKGROUND
Some
4/4/12 investors may overreact and some may under react. investors' reactions be

Usama
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There

are three types of EMH

Strong Semi-Strong Weak

Types of EMH
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FAHAD 10156

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Criticism and behavioral finance

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Criticism and behavioral finance

Warren Buffett has also argued against EMH, saying the preponderance of value investors among the world's best money managers rebuts the claim of EMH proponents that luck is the reason some investors appear more successful than others.

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Late 2000s Financial Crisis

The financial crisis of 20072010 has led to renewed scrutiny and criticism of the hypothesis. Market strategist Jeremy Grantham has stated flatly that the EMH is responsible for the current financial crisis, claiming that belief in the hypothesis caused financial leaders to have a "chronic underestimation of the dangers of asset bubbles breaking".
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M. SHARIQ IQBAL 10055

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Implications for Corporate Finance

Investors Perspective. Financial Manager Perspective

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Investor Perspective

Technical analysis uses past patterns of price and the volume of trading as the basis for predicting future prices. The random-walk evidence suggests that prices of securities are affected by news. Favorable news will push up the price and vice versa. It is therefore appropriate to question the value of technical analysis as a means of choosing security investment.
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Financial Manager Perspective

Managers need to keep in mind that markets would under react or over react to information, the company's share price will reflect the information about their announcements (information).

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EMH is commonly rejected by the general public due to a misconception concerning its meaning. believe that EMH says that a security's price is a correct representation of the value of that business, as calculated by what the business's future returns will actually be. other words, they believe that EMH says a stock's price correctly predicts the underlying company's future results. stock prices clearly do not reflect company future results in many 4/4/12 many people reject EMH cases, as clearly wrong.

Many

In

Since

CONCLUSION

CONCLUSION
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 However,

EMH makes no such statement. Rather, it says that a stock's price represents an aggregation of the probabilities of all future outcomes for the company, based on the best information available at the time. Whether that information turns out to have been correct is not something required by EMH. another way, EMH does not require a stock's price to reflect a company's future performance, just the best possible estimate of that performance that can be made with publicly available information. estimate may still be grossly wrong without violating EMH.
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Put

That

THANKYOU
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