Analysis of the Efficient-Market Hypothesis

The Efficient Market Hypothesis is a hypothesis that points to the fact that all securities are rationally priced in the market. EMH provides an essential organizing principle that helps us understand the dynamics of security markets based on functions and set prices. The basis of EMH is that financial markets are informally efficient. However, there are criticism to the concept of EMH. One of the main criticism of the concept of EMH is that the stock prices always reflect the evidence of irrational exuberance. The idea meaning of this is that people often get carried away by the asset bubbles and booms. For example, the house prices of 2000s (Dot Com Bubble and Bust and the). Furthermore, the behaviorist economist always stress the irrationality of human behavior in making some of the important economic decisions. These two examples confirms the fact that markets cannot always be efficient (Ahn & Kim, 2018). Based on these examples, it would be wrong to claim that all securities are priced rationally in the market and hence EMH is not entirely correct.

Do prices in the Stock Market reflect Public information, why and why not?

The stock market is complex and is influenced by myriads of factors and variables. The complexity of the stock market is combined with its volatility, and hence the trends in the market are sometimes influenced by factors such as the economic, social and political environment. Hence, the stock market prices to a huge extent reflect the ‘public information’. Initially, most of the predictions in the stock market were based on the history of the stock prices and had little to do with the public information (Wei, Zhang & Zhou, 2018). However, with the emergence of social networks and micro-blogs, public opinion is rapidly playing a huge role in the stock market prices. Moving to the question of whether or not everyone has access to the information, the answer is No, not everyone has access to the ‘public information’. The reason for this is because despite the notion of Efficient Market Hypothesis (EMH) it is still impossible to beat the market and hence not everyone has the so-called ‘public information.’ Moreover, even those that may claim to have the information cannot always beat the market. Just as EMH asserts the market always trade at fair value. Nonetheless, it should be understood that not all have access to the ‘public information’ due to the cost of acquiring the information despite the fact that the information may not have a huge impact on what one makes in the stock market (Wei, Zhang & Zhou, 2018). The reason for this is based on the financial principle of ‘the curse of the competitive market”. The more the ‘public information’ becomes accessible to many people the less impact it makes in the stock market due to competition.

Market imperfections and possible causes

From an individual perspective and also from an analytical and contextual perspective, it is right to argue that there are market imperfections. The concept of market imperfection is based on the idea that not everyone has homogenous expectations. The reason for market imperfection is that not everyone has the same information, and hence there is not perfect competition (Ahn & Kim, 2018). The ever-changing dynamics of market information trigger the presence of market imperfection. The dynamism of stock market and other relevant factors in most cases leads to consistency in market imperfection. Hence, the continual market imperfection both in the short run as well as in the long run.

References

Ahn, H., & Kim, D. (2018). Do Stock Price Reactions to Public Information Reflect its Long-run Effect on the Firms’ Fundamental Value? The Case of an Emerging Market, 182-223. Retrieved from https://www.tandfonline.com/doi/abs/10.1080/1226508X.2018.1424011

Wei, G., Zhang, W., & Zhou, L. (2018). Stock trends prediction combining the public opinion analysis. Logistics, Informatics and Service Sciences (LISS), 2015 International Conference On. doi: Barcelona, Spain