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Corporate Finance

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Corporate Finance
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Efficient Market Hypothesis Report

Table of Content
I. Introduction
Page 3

II. Weak efficiency form

Page 3-4

III. Semi-strong efficiency form
Page 4-5

IV. Strong efficiency form
Page 5-6

V. Implications of the efficient market hypothesis for investors
Page 6

VI. Conclusion

Page 6

VII. Bibliography
Page7

I. Introduction
In the book Corporate finance by Denzil Watson and Antony Head (2001), Watson et al refers to a work by Dixon and Holmes (1992) which suggests that the transaction costs ought to be as diminutive as probable to allow for the minimization of hindrances to trading in capital markets and operational efficiency is encouraged. Fama (1970) describes market efficiency hypothesis as “the price of a security fully and fairly reflects all available and relevant information” (Mutlow, 2013). The efficient market hypothesis has dominated both the academic and business environment since the publication of Fama’s classic exposition in 1970. The matter under intense scrutiny is whether it is possible to exploit market inefficiencies to consistently making abnormal returns by trading in the shares using publically available information II. Weak efficiency form
“The weak efficiency form postulates that future stock prices cannot be predicted from historical information about prices and returns” (Beggs, 2013) but rather that asset prices follow a random walk and that any information that could be employed to forecast future prices is autonomous of past prices.
Evidence supporting weak efficiency form
In order to test the weak efficiency form hypothesis, a degree of theories need to be set up. The Random walks theory is one of the less demanding theories which put forth the notion that “the future path of the price level of a security is no more predictable than the path of a series of cumulated random numbers” (Economou, 1994). In arithmetical terminology this simply means that consecutive price changes are



Bibliography: Beggs, J. (2013) The Efficient Markets Hypothesis. About.com: Economics [Online]. Available at: http://economics.about.com/od/Financial-Markets-Category/a/The-Efficient-Markets-Hypothesis.htm [Accessed: 30 October 2013]. Brealey, R. Myers, S. and Allen, F. (2006) Corporate Finance. 8th ed. New York: The McGraw-Hill Companies. Buffet, W. (2010) Understanding stock splits. Investopedia [Online]. Available at: http://www.investopedia.com/articles/01/072501.asp [Accessed: 30 October 2013]. Economou, P. (1994) Empirical evidence on the market efficiency. Unpublished MSc dissertation. University of Strathclyde. Mutlow, D. (2013) Capital markets and market efficiency [Lecture to BA(Hons) Accounting and Finance Year 3]. 30 September. Pike, R. and Neale, B. (2006) Corporate Finance and Investment: Decisions and strategies. 5th ed. Harlow: Pearson Education Limited. Redhead, K. (2003) Introducing Investments: A personal finance approach. Harlow: Pearson Education Limited. Ross, S. Westerfield, R. and Jaffe, J. (1996). Corporate Finance. 4th ed. United States of America: Times Mirror Higher Education. Watson, D. and Head, A. (2001) Corporate Finance: principles and practice. 2nd ed. Harlow: Pearson Education Limited.

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