Week 5 Journal: Market Efficiency
Course Policies Prior to completing your journal, read in your textbook Chapter 12, Market Efficiency, and complete your Market Efficiency Debate discussion post and guided responses, and review all posts in the discussion forum. Writing Center & Library In your journal, be sure to address the following:
Summarize the efficient market hypothesis.
Summarize the two positions of market efficiency (semistrong form and strong form).
State which positions you to believe.
Justify your position.
Week 5 Journal
Efficient market hypotheses:
The efficient market hypothesis contends that the new information immediately reflects in the stock market when it becomes available in the market and therefore neither fundamental analysis nor technical analysis can provide excess profits than the regular return. (Khan, 2021, p.45). This theory assumes that all the relevant information can be reviewed in the market value of stock prices. It is also assumed that the investors cannot outperform the market as they have the same information to analyze that is available in the market.
Semi-strong form efficiency:
Semi-strong form efficiency which is a form of efficient market hypothesis assumes that to release all new public information, current stock prices are adjusted rapidly. The semi-strong form contends that in publicly available markets, the security prices are factored in and the price changes are dependent on that information (Chandrasekaran, 2019, p.198). The semi-strong form is said to be the most practical of all the efficient market hypotheses. Although, the context of material non-public information cannot be explained by it. It also states that neither technical nor fundamental analysis can provide an extra return. Only material non-public information can generate above-average returns on investments.
Strong form efficiency:
Strong form efficiency which is considered to be the strictest form of efficient market hypothesis explains that all the information in the market whether that is private or public is reflected in a stock’s price (Rossi & Gunardi, 2018, p.192). It is believed that not even any insider information can provide an investor an edge and the normal returns cannot be exceeded by the profit regardless of the amount of research or information possessed by the investor (Abdullah, BARAN & AYAZ, 2020, p.10). Even technical analysis, earning estimates, and investment advisory services are useless regarding enhancement of gain, and the only way to maximize the return is to follow the buy-and-hold strategy.
In my opinion, the semi-strong market hypothesis is better with compared to strong form market hypotheses with compared to strong form and I firmly believe in semi-strong form.
My position is such because in the version of semi-strong form it is believed that the information that is not available to the public at the present time can help the investors to outperform the market and boost their returns above the general market. These phenomena can be seen in a real market like news of a merger of companies, natural disasters, or political events that can affect the market in a great manner, and any investor who has prior information of these events can outperform the market and make extra profit than the average market. On the other hand, Strong form efficiency states that the market cannot be outperformed as all the information which are available in the market is reflected in stock price which is not true always, as insider information is not available in the market and very little people have knowledge of that information.
This belief leads me to manage my investments very carefully and diversify my portfolio to avoid the volatility of the market as much as possible and also to focus on the available information in the market along with the information that can be gathered to be one step ahead of the market.
Khan, A., Khan, M. Y., Khan, A. Q., Khan, M. J., & Rahman, Z. U. (2021). Testing the weak form of efficient market hypothesis for socially responsible and Shariah indexes in the USA. Journal of Islamic Accounting and Business Research.
Chandrasekaran, M. (2019). Efficient Market Hypothesis of Indian Capital Markets–A Study. Think India Journal, 22(35), 196-199.
Rossi, M., & Gunardi, A. (2018). Efficient market hypothesis and stock market anomalies: Empirical evidence in four European countries. Journal of Applied Business Research (JABR), 34(1), 183-192.
Abdullah, A. Ç. I. K., BARAN, E., & AYAZ, İ. S. (2020). Testing the efficient market hypothesis: research on stocks of container shipping companies. Global Journal of Economics and Business Studies, 9(17), 1-12.