EMH

Efficient Market Hypothesis (EMH) is actually implying on determining the efficiency of

a market. According to Morningstar (2017) stated that EMH is a market theory that
evolved from Doctor Eugene Fama on Year 1960 which is the market hypothesis stated
that at any given time and in a liquid market. Besides, EMH is a theory used for financial
products fair value especially stock market. EMH is known as the fundamental theory for
finance and economics and explaining the price movements of assets. EMH mostly can be
apply on the capital market. EMH is implying that the volatility of the share prices will
changes according to the relevant information. The relevant information can be
announcements of acquisition, dividend pay-out, changes in accounting policy, and the
countries rules. For example, in Real Property Gains Tax (RPGT) was changed in the
announcement of Budget 2014 which the property owner sell the property within 1 – 3
years will be charged 30 percent of the amount that sell, 4th year charge 20 percent and 5th
year charge 15 percent. Therefore, this information would impact the demand of the
property in Malaysia market especially for those foreign capital that willing to gain from
buy and sell in short period time in order to get profit and caused the relevant construction
sales decreased and share price decreased.

According to Investopedia (2017) stated that EMH caused the investors impossible to “beat
the market” because stock market efficiency cause the share current price changed by
reflect all the relevant information available. Therefore, investors is difficult to buy a
undervalued and sell stock for inflated stock on the stock exchange because the share prices
will change due to the information that might influence the stock prices. Furthermore, EMH
is a kind of Random Walk Hypothesis because the changes of the security might happen
randomly. Efficient market does not allow investors to gain the higher profits without
handling additional risks because technical and fundamental analysis not includes the
relevant information that might reflect the security prices. According to Nath.T (2015)
stated that efficient markets do not always act as rationality while efficient market theory
remains prominent in financial economics, proponents of behavioral finance. For example,
those behavioral finance includes irrational and rational behavior that would drive different
investor’s decision making.
Furthermore, EMH break down into three stages which are weak form of EMH, semi-
strong EMH and strong of EMH which will discuss below the report.
Question A(2)

Among the years, EMH is one of the hottest topic to discuss whether EMH is correct or
incorrect. First, there are two types of investors in generally. First type of investors will be
the investor be who invest with their own set beliefs about how the financial markets
perform and the other set of investors believe the share price will reflect from the historical
data, news and all the relevant information. The investors who invest according to the
information available is believing in EMH and investor think that share price changed
already includes all the information will be disagree with EMH.

There are numerous of the evidence that show the EMH was wrong. First, EMH theory
assumes that investors know all the information towards the shares. If efficient market
helps the investors to beat the market, first the investors should get all the information and
it is impossible because the information is too much and wide. For example, a investor
have the historical data but might not have the insider information, the investors have the
insider information the share price might not grow as expectation.

Second, EMH cannot helps the investors beat the market consistently. The information that
reflect the stock price available this year might not be able to available for the following
years, so that investors could not beat the market as always. According to Unknown (2014)
stated that all the relevant information that already priced in then any gains investor make
over the market will only be temporary and in the long run investor unable to completely
beat the market. For example, a worker knows the particular company insider management
information but after one year the worker might get fire or no longer working in the
company anymore, so that the investor unable to get the information consistently.

Third, EMH able to identify the undervalue stock and overvalued stock is totally wrong.
Even though those financial modeling data able to analyze the whether a shares is
undervalued or overvalued but this might not help to gain with the average return that
expected. Some of the immediate issues happened such as financial crisis, natural disaster
and other uncontrollable factors. According to Nielsen.R (2012) stated that financial crisis
was a very good example of shares being wildly over valued before traders panicked and
the market crashed. Under hypothesis bubbles cannot happen because stock market is the
one who decide the shares value. Therefore, EMH will definitely useless for this issues and
caused the investors lost money as well.

Fourth, EMH theory expect the markets will perform as the average decisions of all
investors and the “the market” equal to an idea of “average investor” is totally wrong
because the stock price is follow a random walk. According to Nielsen.R (2012) stated that
if EMH theory implies that every trader would end up with the similar the similar average
return. This is totally did not reflect the reality. We can see every trader had different return
and even some of that lost in the investments. Warren Buffet is one of the richest man from
investing due to the consistently winning money from the stock market but he quote that
“I would be a bum in the street with a tin cup if the market were efficient” and he is disagree
with the statement that said the market is efficient. Majority of successful investors picking
the stock by their own belief and not following those forecasting by using the information.

Fifth, the market is not efficient because investor behavior. Assumes that all the future
expectations are correct but the theory cannot survive if the traders disagree. “Each trader
operates in a bubble completely separated from everyone else and makes their decisions
completely independently. There is no irrational exuberance and no jumping on the
bandwagon.”(Nielsen.R). One of the main factors that move the stock price will be traders
demand towards the market. Sometimes the market expectation growth 20% in 2 year time
but the short term investors change the stock movement by selling the shares on hand.
According to Choi.J.W (2013) stated that short time thinking is human nature and
sometimes the professional stock broker wanted to invest for long term but their own
investor not let them. For example, the forecasting for company ABC share price will rise
to 30 percent in 3 years but when the share price only rose for 5 percent in half year, a
group of investors with great volume willing to sell their shares because they think 5
percent profit is enough for them. So that, when the selling power stronger than the buying
power the share price will start to drop and caused the other investors sell their shares to
prevent losses caused the price lower than the initial price. Therefore, the investors
behavior would definitely proof the EMH is wrong.
Three forms of Efficiency Market Hypothesis (EMH)

Efficiency Market Hypothesis (EMH) differentiate into three form which are weak form
EMH, semi strong form EMH and Strong EMH. These three form of broke down
depending on the available information towards the share prices.

Weak form EMH is the share prices are influenced by the historical information that
available in the previous market. This information normally includes those historical time
series prices, trading volumes and other previous historical information that might reflect
the security prices. According to Kofarbai.Z.H (2016) stated that security current prices
reflect all the historical data and without form of technical analysis can be exactly utilized
to aid investor trading decision. Therefore, weak EMH allows historical data to identify
undervalued and overvalued shares in order to gain a higher average market of returns. For
example, ABC company net profits had been rising for the past five years, so that investors
buy the ABC company shares because they expect the net profits for the particular
company will continue increasing and caused the share price increased as well but it did
not as expectation, so that the weak form efficient market caused investor lost money
because the share price will affected by various of factors.

Semi Strong form EMH is when the security prices reflected by all the relevant public
information towards the company such as the dividend paid, net profits of the years,
contract that company singed and others. According to Open Learn 2017 stated that market
will quickly digest the publication of relevant new information by moving the price to a
new equilibrium level that reflects the change in supply and demand of the share or security
by the emergency of that information. Those information able to imply on both
fundamental analysis and technical analysis for investor to identify the shares in order to
gain a higher average profits. For example, Alex buy in the Gamuda contruction company’s
share in RM 4.50 because he reads in the financial news that the company had bid a MRT
line 2 which among 300 billions, when the quarter result came out the price rise to RM5.30
but Alex expect the price go further. Gamuda share price drop to RM 3.80 in two months
and Alex lost money because semi strong form efficient will adjust quickly to the newly
available information.
Strong form EMH is a strongest EMH in the efficient market and opposite of weak form
EMH. Strong form EMH includes the information in weak and semi strong EMH. Besides,
strong form EMH includes the insider information relevant to reflect the value of particular
share price. “When a market is strong form efficient, neither technical analysis nor
fundamental analysis nor inside information can help predict future price movements”
(Jan.O, 2018). In a strong form market efficiency might not necessary to earn access return
as well. For example, a mobile CEO of the ABC company know that the company’s net
profit in this year ended will be increase 50 percent compare to last year, so that she buy
10000 shares of the to expect gain a profits, but after the year ended report came out the
stock price does not rise. This is considered a strong form efficient even though the insider
information already priced into the share price.
Reference:

Choi.J.W, (2013), Reason #3 Why Markets Are Not Efficient: Too Much Focus On Short
Term [online], Available at: https://www.moneygeek.ca/weblog/2013/07/15/debunking-
markets-are-efficient-myth-part-5/ [Accessed 3rd February 2018]

Investopedia, (2017), What is the 'Efficient Market Hypothesis - EMH' [online], Available
at: https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp [Accessed 29th
January 2018]

Jan.O, (2018), Strong Form Market Efficiency [online], Available at:

https://xplaind.com/594410/strong-form-market-efficiency [Accessed 1st February 2018]

Kofarbai.H.Z & Zubairu, (2016), Efficient Market Hypothesisin Emerging Market - a

Conceptual Analysis, European Scientific Journal, 12(25), PP 260-270

Morningstar, 2017, Efficient Market Hypothesis [online], Available at:

http://www.morningstar.com/invglossary/efficient_market_hypothesis_definition_what_is.aspx
[Accessed 29th January 2018]

Nath.T, (2015), Investing Basics: What Is The Efficient Market Hypothesis, and What Are

Its Shortcomings? [online], Available at: http://www.nasdaq.com/article/investing-basics-

what-is-the-efficient-market-hypothesis-and-what-are-its-shortcomings-cm530860

[Accessed 3th January 2018]

Nielsen.R, (2012), The Nonsense Of The Efficient Market Hypothesis [online], Available
at: https://whistlinginthewind.org/2012/08/09/the-nonsense-of-the-efficient-market-
hypothesis/ [Accessed 3rd February 2018]

OpenLearn, (2017), 3 The Efficient Markets Hypothesis (EMH) [online], Available at:
http://www.open.edu/openlearn/money-management/money/accounting-and-finance/the-
financial-markets-context/content-section-3 [Accessed 31th January]

Unknown, (2014), The Efficient Markets Hypothesis Has Been Proved Wrong But
Economists Do Not Want to Listen [online], Available at:
https://fixingtheeconomists.wordpress.com/2014/09/05/the-efficient-markets-hypothesis-
has-been-proved-wrong-but-economists-do-not-want-to-listen/ [Accessed 2nd February
2018]