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Custom Efficient Market Hypothesis Essay

The Efficient Market Hypothesis is a contentious hypothesis that says that security costs mirror all obtainable data, making it unproductive to choose stocks (this is, to examine stock in an endeavour to choose some that might return more than the others).The journals, which have been chosen to outline part of this literature review, have precise emphasis of observable facts, which relate to efficient market hypothesis and the global financial crisis. There is substantial uncertainty as to what this supposition is and what it articulates. The incongruity is that the strong connotation of this supposition is that nobody, no specialist, no scholastic and no controller had the aptitude to predict the disintegration of this latest bubble. While a small number of economists regard it to be factually true, this supposition is considered a helpful benchmark with some significant realistic implications. Certainly, a case may be prepared that it was the collapse to believe in the vital reality of this plan, which was a principal factor accountable for the worldwide financial crisis.

1.0  Journal Selection

The titles of the four pieces of writing, which have been chosen for this literature review, are listed below with hard copies attached as appendices to this review.  

Journal 1 (Appendix A)

  • “The efficient markets hypothesis: The demise of the demon of chance?”By Stephen J Brown.

Journal 2 (Appendix B)

  • “Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M).

Journal 3 (Appendix C)

  • “Efficient market hypothesis: evidence from a small open-economy” (Zeynel Abidin Ozdemir).

Journal 4 (Appendix D)

  • “Does the Efficient Market Hypothesis hold?Evidence from six transition economies” (Timotej Jagric, Boris Podobnik & Marko Kolanovic).

2.0  Critical Review of the Relevant Research Literature

The intentions and aims of this literature review are to recognize and crucially appraise through a methodical judgment, investigation and separation of the four selected journals and their notional standpoints, which speak about efficient market hypothesis and the global financial crisis.  This literature review will also include:

  • Objectives of the research.
  •  Key research questions and/or hypotheses.
  •  A consideration of the methodologies used.
  •  Key findings. What are the common themes and the significant differences?
  •  To what extent does the evidence provided support the findings? You will be asked to make a preliminary evaluation of the evidence in terms of its validity, reliability and authenticity.
  •  Possible bias in interpreting the evidence and possible alternative interpretations of the evidence.
  •  Ethical issues and whether they have been dealt with appropriately.
  •  Possible areas for further research.

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2.1 Objectives of the Research

In general, the research aims at identifying the efficient market hypothesis issue and its relation to the global financial crisis. In accordance with the efficient market supposition, a proficient capital market is the one wherein security prices alter rapidly to the advent of new-fangled information, and, consequently, the present prices of securities mirror all data and statistics about the security.

Though, the research objectives of each of the four journals were unique and are stated herein.

Journal 1 (Appendix A)

  • “The efficient markets hypothesis: The demise of the demon of chance?”By Stephen J Brown.

The research objectives for this paper were to find out the efficiency of the stated hypothesis and its effect on the economy and to view its significance and implication to the world economy today.

Journal 2 (Appendix B)

  • “Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M).

In this paper, though, the objective was to view the long-term reactions to large-stock price declines and the increases in the European stock market. It is also trying to correlate this issue with the efficient market hypothesis.

Journal 3 (Appendix C)

  • “Efficient market hypothesis: evidence from a small open-economy” (Zeynel Abidin Ozdemir).

In the third journal, the objective is to see the efficient market hypothesis on a small economy. Ozdemir tries to relate this with stock market efficiency and the overall effect on the economy and asset prices.

Journal 4 (Appendix D)

  • “Does the Efficient Market Hypothesis hold?Evidence from six transition economies” (Timotej Jagric, Boris Podobnik & Marko Kolanovic).

In the Journal 4, Kolanovic et al try to see if indeed the efficient market hypothesis holds. They use case studies from six different countries with transitional economies to observe if the effects are real or imagined.

2.2  Key research Questions and/or Hypotheses

The researchers have recognized gaps in the preceding literature and due to this they have classified their research problems.  Each portion of research has its own purposes and methods, which aid the researchers to respond to their investigative questions. On the other hand, all four journals are on interconnected subjects of efficient market hypothesis and its relation to the global financial crisis. The individual key research questions are indicated herein.

Journal 1 (Appendix A)

  • “The efficient markets hypothesis: The demise of the demon of chance?”By Stephen J Brown.

The key research questions for this paper were:

a.)   What is efficient market hypothesis?

b.)   What is relation between efficient market hypothesis and the economy of a country?

c.)   Is it true or just imagined?

d.)  How is efficient market hypothesis related to random walk hypothesis?

The hypothesis in this journal is that efficient market hypothesis may not be real and hs led to the demise of economies in the world over.

Journal 2 (Appendix B)

  • “Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M).

The key research questions for this paper were:

a.)  What are the long-term reactions to large-stock price declines and the increases in the European stock market?

b.)  What are the control factors relating efficient market to large-stock price declines?

c.)  What are the effects of efficient market hypothesis on the economies of the world?

d.)  Should efficient market hypothesis be replaced by a more psychological framework?

The hypothesis for this paper was the efficient market hypothesis has long-term effects on long-term reactions large stock pile declines.

Journal 3 (Appendix C)

  • “Efficient market hypothesis: evidence from a small open-economy” (Zeynel Abidin Ozdemir).

The key research questions for this journal were:

a.)  What is efficient market hypothesis?

b.)  What is the effect of efficient market on small economies?

c.)  How can the effect of efficient market hypothesis be treated in order to save the concerned economy?

d.)  What is the relation between stock market efficiency and efficient market hypothesis?

The hypothesis for this journal was that the effect of efficient market hypothesis is more pronounced on small economies.

Journal 4 (Appendix D)

  • “Does the Efficient Market Hypothesis hold?Evidence from six transition economies” (Timotej Jagric, Boris Podobnik & Marko Kolanovic).

This journal contained the following key research questions:

a.)  What is efficient market hypothesis?

b.)  Is the efficient market hypothesis real or imagined?

c.)  What can the countries do in order to counter the effects of efficient market hypothesis?

3.2.1 A Consideration of the Methodologies Used

This part describes the research design and methodologies put into use to deal with the research questions.  It will also inspect the information resources, sampling methods and data value. The considerations of methodologies of each journal are shown herein.

Journal 1 (Appendix A)

  • “The efficient markets hypothesis: The demise of the demon of chance?”By Stephen J Brown.

The methodologies used by Brown in this journal were:

a.)  Using sampling methods.

b.)  Use of information resources like online sources, journals and so on.

c.)  Telephone surveys to chief executives.

Journal 2 (Appendix B)

  • “Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M).

The methodologies used by Himmelmann et al in this journal were:

a.)  Using sampling methods.

b.)  Use of information resources like online sources, journals and so on.

c.)  Telephone surveys to chief executives.

Journal 3 (Appendix C)

  • “Efficient market hypothesis: evidence from a small open-economy” (Zeynel Abidin Ozdemir).

The methodologies used in the third journal were:

a.)  Using sampling methods.

b.)  Use of information resources such online sources, journals and so on.

c.)  Telephone surveys to chief executives.

d.)  There was utilization of government records.

Journal 4 (Appendix D)

  • “Does the Efficient Market Hypothesis hold?Evidence from six transition economies” (Timotej Jagric, Boris Podobnik & Marko Kolanovic).

The methodologies used by Kolanovic et al in this journal were:

a.)  Using sampling methods.

b.) In this journal, there were opinions of stock market professionals and journals.

c.) Use of information resources like online sources, journals and so on.

d.) Telephone surveys to chief executives.

All the journals have similar methodologies in that they all used sampling methods, these methods include utilizing various records from economies and online journals concerning efficient market hypothesis. All the journals, especially the first journal made absolute use of information resources to gain information that was used in this paper.  All the papers emphasized on data value as they all presented accurate data and statistics that were used in the journals.

Philosophical Frameworks and Approaches

The four journals take on a positivist philosophical structure.  The idealistic viewpoint from an ontological standpoint is an absolute and pragmatist point of view while from an epistemological view it is an idea and separated attitude. The journals utilize a deductive method, which uses existing hypothesis and assesses it.  The research approach applied is an archival investigation, which uses a mono technique of quantitative investigation over a cross sectional time perspective.  The study is of an experiential temperament with the researchers’ literature review obtaining the theories.  (“Efficient market hypothesis: evidence from a small open-economy” Zeynel Abidin Ozdemir).

Theoretical Framework Applied by the Researchers

Research on financial governance, share stock prices and performance of economies, mainly, is predicated on agency theory as is the case with these four journals. In this paper, the first journal named “The efficient markets hypothesis: The demise of the demon of chance?” By Stephen J Brown. He tries to find out the efficiency of the stated hypothesis and its effect on the economy and to view its significance and implication to the world economy today. In his journal, it is shown that the efficient market hypothesis has an effect on the economy of the countries that are used as a case study. (“Efficient market hypothesis: evidence from a small open-economy” Zeynel Abidin Ozdemir).

In the second journal by Himmelmann et al •    “Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M). They view the long-term reactions to large-stock price declines and the increases in the European stock market. They endeavour to correlate this issue with the efficient market hypothesis. It is important to see that the efficient market hypothesis does have an effect on the stock prices and this issue is important in the overall effect on the economy of a country.

In the third journal- “Efficient market hypothesis: evidence from a small open-economy” (Zeynel Abidin Ozdemir). He tries to see the efficient market hypothesis on a small economy. Ozdemir tries to relate this with stock market efficiency and the overall effect on the economy and asset prices. It is clearly stated that the effects of efficient market hypothesis will have great impact on small economies.

In the Journal 4, “Does the Efficient Market Hypothesis hold? Evidence from six transition economies” (Timotej Jagric, Boris Podobnik & Marko Kolanovic). They try to see if indeed the efficient market hypothesis holds. They use case studies from six different countries with transitional economies to observe if the effects are real or imagined. It is seen that the efficient market hypothesis does hold in some cases while in other cases it does not hold. This will be seen clearly in the key findings section.

Efficient Market Hypothesis

This is an investment concept that states it is difficult to "defeat the market" since stock market effectiveness leads to current share values to continuously integrate and reproduce all pertinent evidence. Conferring to efficient market hypothesis, stocks constantly trade at their reasonable worth on stock interactions, making it unmanageable for depositors to either buy underrated stocks or vend stocks for exaggerated values.

3.2.4 Sampling Methodology

All the writers provided information on the situation in various countries as samples. This ensured that there was widespread theory in all of them. Though, Himmelman et al. involved only particular European countries.

3.2.6  Data Quality

All the researchers made use of secondary information which had been accumulated for a meticulous cause but could also be employed for other rationales. They all employed explanatory statistics, for example, central tendency calculation, the mean and median but no one computed the mode. Computing the central tendency sanctioned the researchers to inspect the class of their data set.  They all employed normality measures like skewness and kurtosis to measure if the information was normally disseminated.  Additionally, they utilized measures of variance, for instance, the standard deviation, in order to scrutinize the dataset’s value to measure whether their information had a stumpy standard deviation, showing that the distribution values were near the mean. 

Journal 1 (Appendix A)

  • “The efficient markets hypothesis: The demise of the demon of chance?”By Stephen J Brown.

In this journal, he makes use of a review of theory and empirical work to obtain the data on the efficient market hypothesis. This data quality is high as it accurate from crosschecking

Journal 2 (Appendix B)

  • “Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M).

This journal takes advantage of data obtained from government records that are accurate, for instance, the statistics that are obtained from these information resources.

Journal 3 (Appendix C)

  • “Efficient market hypothesis: evidence from a small open-economy” (Zeynel Abidin Ozdemir).

Ozmedir takes advantage of Istanbul Stock Exchange National 100. The data obtained from this resource is quality as it is accurate data and is a trusted source of data.

Journal 4 (Appendix D)

  • “Does the Efficient Market Hypothesis hold?Evidence from six transition economies” (Timotej Jagric, Boris Podobnik & Marko Kolanovic).

The data that is obtained for the writing of this journal is based on Hurst exponent. This is a valuable data source and is credible as it has been cross-checked for genuinity.

3.0 Key findings

One of the most lasting irregularities recognized in the economics literature is the experiential scrutiny that stock prices seem to react to pay for about a year following their announcement. Prices of corporations going through optimistic pay surprise have a tendency to float upward, as prices of stocks going through harmful income surprises are likely to drift downhill. This “post-income-statement drift” was initially noted by Ball and Brown in 1968 and has ever since been simulated by frequent studies over diverse time eras and in dissimilar nations. Following more than thirty years of study, this irregularity has yet to be described (Ball, 1968).

Another thread of creative writing examinations the weak form of market efficiency by investigative the expansion from technological examination. At the same time as many early studies found scientific examination to be ineffective, new proof finds proof to the opposite. They discover that comparatively easy technological trading regulations would have been victorious in forecasting transformations in the Dow Jones Industrial Average. (The efficient markets hypothesis: The demise of the demon of chance?” By Stephen J Brown.)Though, succeeding study has found that the expansions from these plans are inadequate to cover their deal costs. As a result, the results are reliable with weak-form market efficiency. (Fama, 1965)

One more study accounted those stocks with lofty income over the past year been inclined to have high returns over the subsequent three to six months (immediate impetus in stock prices). This “drive” result is a moderately novel irregularity and as a result considerably more study is necessary on the theme. Although the product is there in other nation, it has persevered all through.

The semi-strong type of the efficient market hypothesis is possibly the most contentious, and therefore, has fascinated the most consideration. If a market is semi-strong form competent, all publicly accessible data is mirrored in the share price. It shows that shareholders should not be capable of profiting consistently by trading on publicly available information. (Dreaman, 2000)

The underlying principle behind this is that the abundant knowledgeable aggravated experts that work in the monetary markets supposedly shape an able organization for assigning every security the majority of sufficient cost, given the obtainable data. Consequently, no individuals can outmanoeuvre this amazing assemblage and hit the market by habitually purchasing securities at values that are below what they are ought to be. (The efficient markets hypothesis: The demise of the demon of chance?” By Stephen J Brown.)

Stock picking takes, in the best of cases, a lot of work to be just feebly fruitful, so there are probably better things to do with our resources. Instead of picking stocks, it makes sense to buy passively-managed funds with low commissions, such as various ETFs, to obtain the market's average returns. If we are hiring professionals to do stock picking for us (which happens, for example, when we purchase shares of an actively-managed fund) their fees shouldn't be too high, because the potential benefits aren't.

Whenever we attempt to beat the market, by performing security picking ourselves or through a professional (fund manager), let us consider the rationale behind the EMH, to identify potential sources of market inefficiency. For example, we better not try to beat the market by analyzing large-cap companies, because lots of people are doing it, with the same information that is available to us. Instead, coming to know a small company and a niche market could put us (or our fund manager) in an advantageous position compared to the rest of the market. Therefore, active management sounds like a better idea for small-cap funds than for large.

There is tempting confirmation in the monetary fiction suggestive of that aims of conquest efforts gain considerably upon a declaration of the attainment plan by the bidder. Fascinatingly, there is a little rising float in price prior to the statement, showing that some data leaked out. Though, notice that after the declaration the stock value changes are, on standard, close to zero (without any evident tendency). This judgment is steady with efficient market hypothesis, as it proposes that the complete result of the data (about the statement of takeover attempt and the potential implication of the takeover for the target’s value) is included straight away. (“Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M)

4.0 Interpretations of the Evidence

In this investigation we measured the shock of accounting information on stock costs, block trades, fresh issues, stock tears and mutual fund presentation. Most of the proof is steady with the weak and semi-strong types of market efficiency but not in agreement with the strong type. In particular situations, individuals with inside data appear to be capable of earning abnormal profits. This truth may portray an informational incompetence instead of general, which lends credibility to the hypothesis of arbitrage capital markets’ ineffectiveness. Furthermore, block traders can make abnormal income when they deal at the block cost as in purchases of new equity concerns. (“Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M).Supplementary studies could be executed on the blow of the firms’ capital structure conclusions on stock prices. Ariyo’s revision of 1985, though inciting, was not apparent incidentally because it centred on information sufficiency and redundancies. This is a confrontation the researcher will have to take into account in a succeeding attempt (Cornelius 1993).

Also, it is occasionally cited that market movements at times seem bizarre in terms of the efficient market hypothesis of stock price purpose. This insight seems to give confidence to the contact of individual prejudices or psychology on market circumstances. A growing field of study, known as Behavioural Finance, shows how cognitive or emotional biases, which are personal or cooperative, generate irregularities in market costs and income and other divergence from the hypothesis (Anuar 1993).

Behaviour-related moulds typically incorporate insights from psychology with neo-conventional monetary hypothesis. Though, EMH supporters claim that any pragmatic anomalies will be finally adoided in the marketing sphere. They also tend to microstructure. They additionally remind of the need to differentiate between personage biases and communal biases; the first ones can be thrown out by the marketplace, while the latter generate feedback rings that force the market away from the balance of the ‘reasonable price’.  (“Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M)

5.0 Ethical Issues

All four of the journals did not make any reference to whether consideration was given to any ethical issues, which is regarded to as a weakness.  Their work would have been strengthened had they clearly stated that they had given consideration to ethical issues.  For these journals the main ethical aspect would have concerned the integrity and integrity in accounting for the hypotheses testing outcomes without any bias towards individuals, organisational structures or entities (Katerina 2003).

6.0 Conclusions on Research

The researches performed by Stephen J. Brown and Zeynel Abidin Ozdemir are methodologically sound, robust and well recorded. The weakest study, according to the journals reassessed, was conducted by Himmelmann and his colleagues. Their research allowed Stephen J. Brown to strengthen their methodologies. Kolanovic et al. also performed high-quality research because he and his team had read the preceding literature and had taken the most excellent elements of it and learnt which regions could profit from additional improvements.  By assuming this approach he produced a strong piece of investigation. (“Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M)Each of these pieces of investigations contributed to the literature and the widespread body of information with some being sturdier than the others. (The efficient markets hypothesis: The demise of the demon of chance?” By Stephen J Brown.)

It can be concluded that the efficient market hypothesis has an effect on the economies of the world. This can only be curbed by the use of better psychological framework in the financial scheme in the governance sector.

7.0 Possible Areas for Further Research

It would be advantageous if upcoming investigations could be carried out in countries with similar economic conditions in all the journals and those which were most affected by the financial crisis. This is important for us to be capable of benefitting from apprehending the relation between the efficient market hypothesis and the financial crisis. (“Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency” (Himmelmann, A, Schiereck, D, Simpson, MW & Zschoche, M)

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