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Hypothesis of research paper

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This article possibly contains original research. A direct implication is that it is impossible to «beat the market» consistently on a risk-adjusted basis since hypothesis of research paper prices should only react to new information. The efficient-market hypothesis was developed by Eugene Fama who argued that stocks always trade at their fair value, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

Hypothesis essay

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There are three variants of the hypothesis: «weak», «semi-strong», and «strong» form. There is no quantitative measure of market efficiency and testing the idea is difficult. So-called «effect studies» provide some of the best evidence, but they are open to other interpretations. Benoit Mandelbrot claimed the efficient markets theory was first proposed by the French mathematician Louis Bachelier in 1900 in his PhD thesis «The Theory of Speculation» describing how prices of commodities and stocks varied in markets. The efficient markets theory was not popular until the 1960s when the advent of computers made it possible to compare calculations and prices of hundreds of stocks more quickly and effortlessly. In 1945, Hayek argued that markets were the most effective way of aggregating the pieces of information dispersed among individuals within a society.

Empirically, a number of studies indicated that US stock prices and related financial series followed a random walk model in the short-term. Whilst there is some predictability over the long-term, the extent to which this is due to rational time-varying risk premia as opposed to behavioral reasons is a subject of debate. The efficient-market hypothesis emerged as a prominent theory in the mid-1960s. Paul Samuelson had begun to circulate Bachelier’s work among economists.

In 1964 Bachelier’s dissertation along with the empirical studies mentioned above were published in an anthology edited by Paul Cootner. It has been argued that the stock market is «micro efficient» but not «macro efficient». The main proponent of this view was Samuelson, who asserted that the EMH is much better suited for individual stocks than it is for the aggregate stock market. Research based on regression and scatter diagrams has strongly supported Samuelson’s dictum.

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