Scribd
Upload
6 views

SAPMM PPT

The Efficient Market Hypothesis (EMH) posits that financial instrument prices reflect all available market information, making it impossible for investors to consistently outperform the market. Developed by Eugene Fama in 1970, EMH has three forms: weak, semi-strong, and strong, each addressing the impact of public and private information on stock prices. Despite its significance, EMH faces criticism for not accounting for irrational investor behavior and market anomalies, leading to ongoing research in behavioral finance.

Uploaded by

nikhilssharma491
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
6 views

SAPMM PPT

The Efficient Market Hypothesis (EMH) posits that financial instrument prices reflect all available market information, making it impossible for investors to consistently outperform the market. Developed by Eugene Fama in 1970, EMH has three forms: weak, semi-strong, and strong, each addressing the impact of public and private information on stock prices. Despite its significance, EMH faces criticism for not accounting for irrational investor behavior and market anomalies, leading to ongoing research in behavioral finance.

Uploaded by

nikhilssharma491
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 9

INTRODUCTION

EMH is an investment theory which suggests that the prices of financial


instruments reflect all available market information. Hence, investors
cannot have an edge over each other by analysing the stocks and
adopting different market timing strategies.

1900
In his 1900 doctoral thesis, Theorie de la speculation, Louis Bachelier compared financial asset prices to a random walk.

MID 1960s
After discovering Bachelier's work, Paul Samuelson reformulated the hypothesis by assuming that agents are rational.

1970
In his 1970 book, Efficient Capital Markets: A Review of Theory and Empirical Work, Eugene Fama developed the EMH to define the market's ability to reflect all available
information on financial asset prices. Fama is known as the "father of modern finance" and is strongly associated with the EMH
ASUMPTIONS OF EMH
• Stocks are traded on exchanges at their fair market values.

• This theory assumes that the market value of stocks


represent all relevant information.

• It assumes that investors are not capable of outperforming


the market since they have to make decisions based on the
same available information.
FORMS
OF EMH

WEAK SEMI – STRONG STRONG FORM


It implies that technical trading cannot The semi-strong form of the theory According to the strong form of the EMH,
provide consistent excesss returns dismisses the usefulness of both technical not even insider knowledge can give
because past price performance can’t and fundamental analysis. investors a predictive edge that will
predict future action that will be based enable them to consistently generate
on new information. returns that outperform the overall market
Prices adjust quickly to any new public average.
information that becomes available,
It leaves the possibility that therefore rendering fundamental analysis
fundamental analysis may provide a The strong form of the EMH holds that
incapable of having any predictive power prices always reflect the entirely of both
means of outperforming the overall about future price movements.
market average returns on investment. public and private information. This
includes all publicly available
information, both historical and new, or
current, as well as insider information.
EMH USEFUL OR NOT
• Rakesh Jhunjhunwala bought shares of Titan Company in 2002-2003 at an
average price of ₹3–4 per share. He continued to buy and sell shares over the
years.
• Jhunjhunwala's investment in Titan is considered a classic example of long-
term investing.
• He bought shares when the stock was considered risky, but he believed in the
company's potential.
• He held onto the stock even during the 2008 global recession.
• Jhunjhunwala's investment in Titan has delivered huge returns over the years.
• The stock price of Titan has risen from around ₹3 to ₹2,500 in the last 20 years.
• This has delivered an 83,250% return to investors during this time.
LET’s BE PRACTICAL
In 2024
1 rupee in 2002 = 3.6 rupees in 2024
ROLE OF INFORMATION IN
EFFICIENT MARKET
Types of Market Information (Public vs. Private):

• In financial markets, public information (like company earnings reports or economic


data) is available to everyone, while private information is only known to specific
individuals (like insider knowledge). Efficient markets depend on public information
being quickly reflected in stock prices.

• Speed of Information Dissemination:

• The faster information spreads, the more efficiently it can be incorporated into asset
prices. For example, news about a company’s success should quickly influence its stock
price if markets are efficient.
MARKET BUBBBLES AND
CRASHES : A CHALLENGE TO
EMH
Role of Speculation and Irrational Behavior:

• Speculation occurs when investors buy or sell based on what they think others will do, rather
than actual value. Irrational behavior, like fear or greed, can drive prices far above or below
their true value, creating bubbles (overvalued markets) or crashes (sharp declines).

Historical Examples :
• Dot-Com Bubble (Late 1990s): Investors poured money into internet-related companies,
driving their prices sky-high despite many having no profits. When reality set in, the market
crashed in 2000.

• 2008 Financial Crisis: Excessive risk-taking and speculation in the housing market led to a
global financial meltdown.
Practical Applications of EMH in
Financial Markets
Impacts on Asset Pricing Models :

• The Efficient Market Hypothesis (EMH) suggests that asset prices already reflect
all available information. This influences pricing models, like the Capital Asset
Pricing Model (CAPM), used to estimate returns based on risk.

Use of Index Funds and Diversification :

• If markets are efficient, beating the market consistently is hard. This is why many
investors use index funds (which track the market) and diversify their portfolios to
reduce risk while aiming for steady returns.
Conclusion
• EMH in Modern Financial Theory EMH is important,
but not perfect. Critics say people don’t always act
rationally, and hidden information can disrupt
efficiency.

• It still helps us understand markets and inspires


research into areas like behavioral finance (studying
how emotions affect investing).

You might also like