: EFFICIENT CAPITAL MARKETS THEORY PRESENTED BY: 1. ALICE NGUMA 2. CYRUS M. MURIITHI 3. AMBROSE AGENG’A 4. ALBANUS M. MUMO 5. BENSON M. NGARI 6. EVALINE A. OMONDI D61/79053/2010 D61/61646/2010 D61/60495/2010 D61/61648/2010 D61/61 D61/60121/2010



ABBREVIATIONS........................................................................II CHAPTER ONE...........................................................................1
1.0 INTRODUCTION.......................................................................................1 1.1 Overview of the Efficient Market Hypothesis............................................................1 1.2 Historical Development of the Efficiency Market Theory...........................................2 1.3 Types of Capital Market Efficiencies.........................................................................3 1.4 The Value of an Efficient Market ..............................................................................3 1.5 Implications of the Efficient Market Hypothesis........................................................4

CHAPTER TWO..........................................................................6
2.0 LITERATURE REVIEW...............................................................................6 2.1 Empirical Evidence...................................................................................................6 2.2 Weak Form Market Efficiency..................................................................................7 2.3 Semi-Strong Form Market Efficiency.........................................................................9 2.4 Strong-Form Market Efficiency................................................................................11 2.5 Efficient Markets and Technical Analysis................................................................12 2.6 Efficient Markets and Fundamental Analysis...........................................................13

CHAPTER THREE......................................................................15
3.0 RESEARCH GAPS...................................................................................15



ABBREVIATIONS EMH – Efficient Market Hypothesis NSE – Nairobi Stock Exchange ii .

Although the price adjustments may be imperfect. and the timing of one announcement is generally independent of others. Meaning that sometimes the market will over-adjust and other times it will underadjust. therefore the current prices of securities reflect all information about the security. including the risk involved in owning the security. the security prices that prevail at any time should be an unbiased reflection of all currently available information. in an efficient market. Information coming in a random. A second assumption is that new information regarding securities comes to the market in a random fashion. independent. Bodie (2009) argues that because security prices adjust to all new information the security prices should reflect all information that is publicly available at any point in time. unpredictable fashion and (2) numerous competing investors adjusting stock prices rapidly to reflect this new information means that one would expect price changes to be independent and random.CHAPTER ONE 1. Therefore. The combined effect of: (1). it is unbiased. This is referred to as an informationally efficient market meaning that one cannot consistently achieve returns in excess of average market returns on a risk adjusted basis.1 Overview of the Efficient Market Hypothesis Efficient markets theory of financial economics states that the prices reflect all relevant information that is available about the intrinsic value of the asset. given the information publicly available at the time the investment is made. which means that investors who buy at these informationally efficient prices should receive a rate of return that is consistent with the perceived risk of the stock. Reilly and Brown (2006) argue that for a capital market to be termed as efficient several assumptions are made.0 INTRODUCTION 1. The third assumption is profit maximizing investors adjust security prices rapidly to reflect the effect of new information. but it can not be predicted which one will occur at any given time. Therefore. An important premise of an efficient market requires that a large number of profit maximization participants analyze and value securities. the expected returns implicit in the current price of the security should reflect its risk. 1 . independent of the other. According to Reilly and Brown (2006) an efficient capital market is one in which security prices adjust rapidly to the arrival of new information and.

The EMH was first expressed by Louis Bachelier. became mainstream (Fama 1970). However. Fama (1970) presented the efficient market theory in terms of a fair game model.Most of the early work related to efficient capital markets was based on the random walk hypothesis. a French mathematician in his 1900 dissertation.2 Historical Development of the Efficiency Market Theory The Efficient Market Hypothesis was developed by Professor Eugene Fama at the University of Chicago Booth School Of Business as an academic concept of study through his published PhD thesis in the early 1960’s at the same school. 2 . In 1965. who were a fringe element. independent work corroborated his thesis. contending that investors can be confident that a current market price fully reflects all available information about a security and the reflected return based upon this price is consistent with risk. It was widely accepted up until the 1990’s. “The Theory of Speculation”. beginning in the 30’s scattered. His work was largely ignored until the 1950’s. In 1970. Paul Samuelson had begun to circulate Bachelier’s work among economists. however most tests of the efficient market hypothesis. The Efficient Market Hypothesis emerged as a prominent theory in the mid 1960’s. were published in an anthology edited by Paul Cootner. when Behavioural Finance economists. Bachelier’s dissertation along with the empirical studies mentioned above. unable to outperform the market (DeBondt 1985). A small number of studies indicated the US stock prices and related financial series followed a random walk model. In 1964. deal with how fast information is incorporated in prices (Reilly and Brown 2006). Fama published a review of both the theory and the evidence for the hypothesis (Olsen 1998). Research by Alfred Cowles in the 30’s and 40’s suggested that professional investors were in general. Eugene Fama published his dissertation arguing for the random walk hypothesis and Samuelson published a proof version of the EMH. 1. Some theorists argue that prices ought to accurately reflect fundamental information for a market to be efficient. which contended that changes in stock prices occurred randomly (Levy 2005).

In implementing a shareholder wealth-enhancing decision the manager will need to be assured that the implication of the decision is accurately signaled to shareholders and to management through a rise in the security price. This will seriously reduce the availability of funds to companies and inhibit growth. Investors need to know they are paying a fair price and that they will be able to sell at a fair price – that the market is a “fair game” (Olsen 1998). 1.1. To give correct signals to company managers – Since the maximization of shareholder wealth can be represented by the security price in an efficient market.3 Types of Capital Market Efficiencies Fama (1970) divided the overall efficient capital market hypothesis and the empirical tests of the hypothesis into three sub-hypothesis. The semi strong form asserts that security prices adjust rapidly to the release of all public information. The strong form efficiency market states that security prices reflect all information implying that nobody has private information and no group should be able to derive above average returns consistently. To help allocate resources – allocation efficiency requires both operating efficiency and pricing efficiency.4 The Value of an Efficient Market It is important that stock markets are efficient for at least three reasons: To encourage trading in securities – accurate pricing is required if individuals are going to be encouraged to invest in private and public enterprises. It is important that managers receive feedback on their decisions from the share market so that they are encouraged to pursue shareholder wealth strategies (Mishkin 2007). If a poorly run company in a declining industry has highly valued securities because the stock market is not pricing correctly then this firm will be able to issue 3 . If securities are incorrectly priced many savers will refuse to invest because of a fear that when they come to sell the price may be perverse and may not represent the fundamental attractions of the firm. sound financial decision-making relies on the correct pricing of the company’s securities. The weak form efficient market hypothesis states that stock prices fully reflect all market information so any trading rule that uses the past market data to predict future returns should have no value.

Investors For the vast majority of people. government rulings and stock market regulation to provide as much as is compatible with the necessity for some secrecy to prevent competitors gaining useful knowledge(Reilly 2007). These actions will result in additional. Most of the time these tricks are transparent to investors. accounting bodies. There are some circumstances when the drive for short-term boosts to reported earnings could be positively harmful to shareholders. thereby avoiding costs of analysis and transaction (Olsen 1998). returns above the normal level for that systematic risk class).new securities. and thus attract more of society’s savings for use within its business. taxation payments. The implication is that fundamental analysis is a waste of money and that so long as efficiency is maintained the average investor should simply select a suitably diversified-portfolio. and so companies should be encouraged by investor pressure. and security prices do not rise artificially (Mishkin 2007). or at least earlier. who are able to interpret the real position. Investors need to press for a greater volume of timely information. Semi-strong efficiency depends on the quality and quantity of publicly available information. another might not write off bad debts. which will be harmful to shareholder wealth (Olsen 1998) The timing of security issues does not have to be fine-tuned: Consider a team of managers contemplating a share issue who feel that their securities are currently under-priced because 4 . For example. This would be wrong for society as the funds would be better used elsewhere (Mishkin 2007). public information cannot be used to earn abnormal returns (that is. Companies Some managers behave as though they believe they can fool shareholders. one firm might tend to overvalue its stock to boost short-term profitability. 1.5 Implications of the Efficient Market Hypothesis The efficient market hypothesis has a number of implications for both the investors and the companies. For example creative accounting is used to show a more impressive performance than is justified.

The past price movements have nothing to say about future movements (Osman 2007). hoping that the market will rise to a more normal level.the market is low. Bad news announcements are more tricky – to sell the securities to new investors while withholding bad news will benefit existing shareholders. The situation is somewhat different if the managers have private information that they know is not yet priced into the securities. This defies the logic of the EMH – if the market is efficient the securities are already correctly priced and it is just as likely that the next move in prices will be down as up. but will result in loss for the new shareholders (Rozeff 1998) 5 . In this case if the directors have good news then they would be wise to wait until after an announcement and subsequent adjustment to the share price before selling the new securities. They opt to delay the sale.

neither technical analysis. Thus. asset values. the news spreads very quickly and is incorporated into the prices of securities without delay. All subsequent price changes represent random departures from previous prices.1 Empirical Evidence Revolutions often spawn counterrevolutions and the efficient market hypothesis in finance is no exception. The efficient market hypothesis is associated with the idea of a “random walk. for example. Fama’s (1970) influential survey article.” It was generally believed that securities markets were extremely efficient in reflecting information about individual stocks and about the stock market as a whole.” (Samuelson 1965). it was generally believed that securities markets were extremely efficient in reflecting information about individual stocks and about the stock market as a whole. The intellectual dominance of the efficient-market revolution has been challenged by economists who stress psychological and behavioural elements of stock-price determination and by econometricians who argue that stock returns are. predictable (Levy 2005). This work supported the view that the stock market has no memory. The accepted view was that when information arises. Fama (1970) classifies the market efficiency into three levels on the basis of the information: Weak. Semi-strong and Strong forms.CHAPTER TWO 2. The original empirical work supporting the notion of randomness in stock prices looked at such measures of short-run serial correlations between successive stock-price changes. would enable an investor to achieve returns greater than those that could be obtained by holding a randomly selected portfolio of individual stocks with comparable risk ((Fama 1970). nor even fundamental analysis. the efficient market hypothesis was widely accepted by academic financial economists. which is the study of past stock prices in an attempt to predict future prices.0 LITERATURE REVIEW The efficient market hypothesis was widely accepted by academic financial economists. A generation ago. to a considerable extent. “Efficient Capital Markets. 2. which is the analysis of financial information such as company earnings. etc. 6 . to help investors select “undervalued” stocks.

trading volume data. The study showed that the relationship between the stock market prices and sales turnover. profit before tax and dividends.lot transactions. Mburu (2007) studied the relationship between trading volume and stock prices movements on 20 securities for companies that constitute the NSE 20 share index that remained listed at 7 . Cross tabulation was used to analyze the data. Thus the NSE is inefficient in the weak form of EMH. Stock prices are determined by the expected future earnings of the company and not the current trends that are depicted by the past performance. Wanjohi (2007) studied the relationship between the stock market prices. Descriptive statistics and time series analysis was used to describe the performance of the companies over the study period. and other market generated information. Therefore. sales turnover. Cross sectional research design was used in the study. this hypothesis implies that past rates of return and other historical market data should have no relationship with future rates of return. such as odd. Data was collected over a specified duration of time both dependent and independent variables concurrently. profit before tax and dividends from year 2000 to 2004 for all companies listed in NSE. profit before tax as well as dividends is uneven from one year to the other and where there is a relationship it is not significant.2. The objective of the study was to evaluate the relationship between the stock market return. this hypothesis contends that one should gain little from using any trading rule that decides whether to buy or sell a security based on past rate of return or any other past security market data (Reilly 2006). The population consisted of all companies listed at NSE before year 2000 and had published their financial statements from January 2000 to December 2004. high demand for companies’ products increases profitability hence high dividend payout are expected.2 Weak Form Market Efficiency The weak form EMH assumes that current stock prices fully reflect all security market information. sales turnover. including the historical sequence of prices. rate of return. The hypothesis assumes that current market prices already reflect all past returns and any other security market information. Studies have shown that earnings announcements. block trades and transactions by exchange specialists (Reilly 2006). All the 48 companies listed in the NSE were included to increase precision.

the day of the week. There were no significant causal relationship between the stock prices and volume of securities traded at NSE. (5).Cyclical Tests and (6) Volatility Tests (Reilly 2006). The objective of the study was to determine whether trading volume behaviour has a significant effect on the stock’s price movements. (3). returns on Monday are much lower than on other days of the week such as in the Nairobi Stock Exchange (NSE). are large in size. There are various methods to test the dependence of Weak-Form of market efficiency these include: (1). Correlation coefficient test were conducted to assess whether there existed significant Co. Markets are inefficient because one would expect that the patterns would disappear as investors exploit them. Time patterns in security returns A number of studies have reported time patterns in security returns. returns being higher or lower depending on the time of the day. Trends in prices volume sensitivity was used to analyze the data. (4). Hence. and the month of the year. A sample of 20 companies which formed the NSE 20 share index. The population constituted of 53 companies at the NSE. and they are simply random. Exploratory study was used. Some studies have explained that these patterns are partly induced by the market structure and order flows (Mishkin 2007). The finding does not substantiate the weak form of EMH since it shows that past trading volume do not play a role in driving stock prices. Many researchers working on these variables. Short-term predictability.Filter Rule Tests. (2). Run Tests. but due to transactional costs. and set of data. Intra-day and Day-of the week patterns One pattern that has been extensively examined is the difference in return for various days of the week.the NSE and traded between January 2002 and December 2006. the return differences are not large enough to develop a trading strategy to take advantage of them (Mishkin 2007). patterns have been found. The price to volume sensitivity for stock making the NSE 20 share index was not found to deviate from 0. Serial Correlation test. actively traded and traded in large volumes was selected. 8 .movement between changes in price indices and volume traded. the advice to traders to sell late Friday and purchase on Monday.

form EMH asserts that security prices adjust rapidly to the release of all public information. However. The result of the study was that holiday’s do not have a significant impact on stock market activity at the NSE i.3 Semi-Strong Form Market Efficiency The semi strong. The 9 . The T-test (two-tailed test) was applied to assess the significance of the coefficients derived from the equation.e. current security prices fully reflect all public information.e. In a study by Osman (2007) to investigate whether the stock returns at the Nairobi Stock Exchange (NSE) exhibit holiday effect and used regression analysis to find out if the stock returns around the public holidays were higher compared to the returns of other days of the week. there is no holiday effect. Secondary data from AIG Investment Services was used. 2. The study used the daily AIG index returns from AIG Investment Services from 1st January 1998 to 31st December 2006. the differences in small stocks are much larger than for large stocks thus most of the high January return effect is associated with small stocks. 27 companies. the 27 companies. 20 of these constituting the NSE 20 Share Index. Holiday Effect The Holiday Effect anomaly portends that on average. that is. The sample included companies listed and constituting the AIG Index from 1st January 1998 to 31st December 2006 i. high stock returns are earned on the day preceding the public holidays than other trading days. Gultekin (1984) studied January return patters in 17 countries including the United States. whose findings were that much higher returns were recorded in January than in Non-January months in all the countries. January Effect January effect has been studied in broad. The population of the study consists of all the companies constituting the AIG index as at 31st December 2006 i. The duration (period) of nine years was considered. Kamau (2003) sought to establish if there was turn of the month and January effects on stock prices at the NSE during the period July 1995 to June 2003 using NSE daily closing prices and found that it did not suffice.Monthly patterns Extensive research finds that returns in January are substantially higher than returns in other months.e.

A sample of 21 stock dividend announcement events at NSE covering a 7 year period from January 1999 to 31st December 2005 were tested. 10 . dividend yield (D/P ratios). A comparison of the returns on the event day and succeeding was done through analysis of the average cumulative abnormal returns. The objective of the study was to examine whether the behaviour of stock prices following stock dividend announcement show evidence of existence of under-reaction anomaly at NSE. The results showed evidence in favour of existence of under-reaction to stock dividends announcement at the NSE for the period under study. Some of the studies done to support semi strong market efficient hypothesis are: Dividend announcements Njeru (2007) sought to test for existence of under reaction anomaly at NSE. The comparison period being 50 days period starting 60 days before the event and ending 10 days to the event. Under-reaction anomaly refers to the tendency of stock prices to continue reacting to important announcement in the days following the announcement date. such as earnings and dividend announcements.form hypothesis. considering the cost of trading because the security price already reflects all such new public information (Mishkin 2007). This shows that NSE portrays evidence of inefficiency in the semi strong form of market efficiency. news about the economy and political news (Reilly 2006). The study was based on event study design with stock dividend announcement being the event of importance. The population comprised of all the listed companies at NSE between 1st January 1999 and 31st December 2006 of 48 companies.semi strong hypothesis encompasses the weak form hypothesis. stock splits. rates of return and trading volume is public. This hypothesis implies that investors who base their decision on any important new information after it is public should not derive above average risk-adjusted profits from their transactions. such as stock prices. A comparison period return approach was used in analyzing price movements. Public information. All companies who declared stock dividends in the period and traded continually for at least 60 days before the stock bonus announcement were included in the sample. price-to -earnings (P/E ratios). because all the market information considered by the weak.

as well as being perceived by the market as negative information (Reilly 2007). Stock splits Stock split is a corporate action in which a company existing securities are dividend into multiple securities. Event study design was used. after the stock split there is no extraordinary return.Banda (2006) conducted a study on Market reaction to shareholders annual general meeting of company’s listed at Nairobi stock exchange between 1998 to 2001. The population consisted of all companies quoted in stock exchange from 1998 to 2001. Block trading occurs when a large number of stocks are suddenly placed on the market for sale. This means that no group of investors has monopolistic access to 11 . options or other investments Market efficiency means the security price should reflect all the information. It was found that abnormal returns were observed in post and pre AGM in a number of securities listed in the stock exchange. This causes imbalance in the supply and demand in the market. Fama et al. and the situation returns to exactly what EMH predicted. so that dilution does not occur (Bodie 2009). corporation or institution of a large quantity of stocks. 2. Stock split increases the number of securities in public company. futures. (1969) performed the first test for semi-strong market efficiency. he found a considerable high abnormal return prior to the announcement of stock split. bonds. The price is adjusted such that the market capitalisation of the company remains the same after the split.4 Strong-Form Market Efficiency The strong – form EMH contends that stock prices fully reflect all information from public and private sources. Given that a number of issues to be deliberated during the AGM are public information prior to the AGM. The study objective was to investigate whether resolutions passed at AGM trigger unusual movement of securities traded at Nairobi stock exchange. On the other hand. Block trades According to Olsen (1998) block trades refers to the purchase or sale by a wealthy individual. A sample of 20 companies was used which constitute NSE share index. Using riskadjusted return to test for market efficiency with respect to the announcement of stock split.

information relevant to the formation of prices. by testing the return that is earned by the insider. Thus. it is not immediately available to everyone but is typically disseminated from the informed professionals to the aggressive investing public and then to the great bulk of investors. 2. Empirical tests of the strong-form version of the efficient markets hypothesis have typically focused on the profitability of insider trading. A basic premise of technical analysis is that stock prices move in trends that persist (Reilly 2007). it does not appear to be consistent with the strong-form of the EMH. If the strong-form efficiency hypothesis is correct. Further. A more recent paper by Rozeff and Zaman (1988) finds that insider profits. This process takes time (Reilly 2007). using indirect test by examining the return and trading volume prior to public announcement (Olsen 1998). Technical analysts are sometimes called chartists because they study records or charts of past stock prices. hoping to find patterns they can exploit to make a profit. Therefore technicians hypothesize that stock prices move to a new equilibrium after the release of new information in a gradual manner. which causes trends in stock prices movements that persists. The assumptions of technical analysis directly oppose the notion of efficient markets. in which prices adjust rapidly to the release of new public information. Technicians believe that when new information comes to the markets.5 Efficient Markets and Technical Analysis Technical analysis is essentially the search for recurrent and predictable patterns in stock prices (Bodie 2009). in which all information is cost free and available to everyone at the same time (Reilly 2006) Testing of EMH in the strong form is conducted in different ways: first. The strong form EMH encompasses both the weak. to assume perfect markets. second. after deducting an assumed 2 percent transaction costs. 12 . then insiders should not be able to profit by trading on their private information (Jaffe 1974).According to Bodie (2009) the key to successful technical analysis is a sluggish response of stocks prices to fundamental supply and demand factors. Jaffe (1974) finds considerable evidence that insider trades are profitable. technicians contend that investors do not analyze information and act immediately. the strong form EMH extends the assumption of efficient markets.form and the semi strong form EMH. Also. are 3% per year.

They supplement this analysis with further detailed economic analysis. gradual price adjustment (Reilly 2007). If the value exceeds the stock price. and not buy or you sell. the price adjustment has taken place.Technical analysts believe that nimble traders can develop systems to detect the beginning of a movement to a new equilibrium (called a breakout). if the market price is above the intrinsic value. and risk evaluation of the firm to determine proper stock prices. If the prevailing market price differs from the estimated intrinsic value by enough to cover transaction costs. they hope to buy or sell the stock immediately after its break out to take advantage of the subsequent. 2.6 Efficient Markets and Fundamental Analysis According to Bodie (2009) fundamental analysis uses earning and dividend prospects of the firm. To buy if the market price is substantially below intrinsic value. there is a basic intrinsic value for the aggregate stock market. expectations of future interest rates. or individual securities and that these value depend on underlying economic factor (Reilly 2007). Therefore a purchase or sale using technical trading rule should not generate abnormal returns after taking account of risk and transaction costs (Reilly 2007). company analysis and portfolio management. Fundamental analysts usually start with the study of past earnings and an examination of company balance sheets. at any time. It represents an attempt to determine the present discounted value of all the payments a stockholder will receive from each share of stock. By the time the information is public. the fundamental analyst would recommend purchasing the stock. The belief in this pattern of price adjustment directly contradicts advocates of the EMH who believe that security prices adjust to news information very rapidly has stated by Fama in his 1970 hypothesis. various industries. Fundamental analysts believe that. If the capital market is weak form efficient then prices fully reflects all relevant market information so technical trading systems that depend only on past trading data cannot have any value (Reilly 2007). It involves aggregate market analysis. ordinarily including an evaluation of the quality of the firm’s management and the industry prospect (Bodie 2009). 13 . industry analysis. an investor should take appropriate action. Hence.

Aggregate Market Analysis with Efficient Capital Markets EMH implies that if you examine only the past economic events. investors recommends over time in relation to the performance of a set of randomly selected stocks of 14 . The stock selection of a superior analyst or investor should consistently out perform the randomly selected stocks. The consistency requirement is crucial because one would expect a portfolio developed by random selection to outperform the market about half the time (Reilly 2007). market price and intrinsic value differ but eventually investors recognize the discrepancy and correct it (Reilly 2007). he will not experience superior risk adjusted returns (Reilly 2007).Investors who are engaged in fundamental analysis believe that occasionally. it is unlikely that you will be able to out perform a buy and hold policy because the market rapidly adjusts to known economic events. Industry And Company Analysis with Efficient Capital Markets Wide distribution of returns from different industries and companies clearly justifies industry and company analysis. Therefore. The superior analyst or successful investor must understand what variables are relevant to the valuation process and have the ability and work ethic to do a superior job of estimating these important valuation variables. EMH does not contradict the potential value of industry and company analysis but implies that an investor needs to (1) Understand the relevant variables that affect rate of return and (2) do a superior job of estimating future values of these relevant variables (Reilly 2007). one should examine the performance of numerous securities that this analysts or the same risk class. According to Reilly (2007) to determine if an individual is a superior analyst or investor. if an investor uses historical data to estimate future values and invest on the basis of the estimates.

and innovator in the field of law and economics to back away from the hypothesis and express some degree of belief in Keynesian economics. Behavioural economists attribute the imperfections in financial markets to a combination of cognitive biases such as overconfidence.the hypothesis took centre stage.These errors in reasoning lead most investors to avoid value stocks and buy growth stocks at expensive prices.Posner accused some of his ‘Chicago school’ colleagues of being ‘asleep at the switch’ saying that ‘the movement to deregulate the financial industry went too far by exaggerating the resilience-the self healing powers-of laissez-faire capitalism’. Market strategies Jeremy Grantham has stated flatly that the EMH is responsible for the current financial crisis. which allow those who reason correctly to profit from bargains in neglected value stocks and overreacted selling of growth stocks. The financial crisis of 2007-2010 has led to renewed scrutiny and criticism of hypothesis. claiming that belief in the hypothesis caused financial leaders to have ‘’chronic underestimation of the dangers of asset bubbles breaking’’. Others such as Fama himself.0 RESEARCH GAPS Investors and researchers have disputed the EMH both empirically and theoretically. said that the hypothesis 15 . overreaction.Noted financial journalist Roger Lowenstein blasted the theory declaring ‘the upside of the current great recession is that it could drive a stake through the heart of the academic nostrum known as EMH’’ . representative bias. saying that the hypothesis had not failed. Richard Thaler and Paul Slovic. Amos Tversky. These have been researched by psychologists such as Daniel Kahneman. Martin Wolf. The financial crisis has led Richard Posner. but was ‘seriously flawed’ in its neglect of human nature. university of Chicago law professor. the chief economics commentator for the financial times dismissed the hypothesis as being a useless way to examine how markets function in reality. Paul McCulley. information bias and various other predictable human errors in reasoning and information processing. There is therefore need for further studies to investigate the extent to which financial market imperfections are affected by these biases and other predictable human errors in reasoning and information processing. was less extreme in his criticism.At the international organization of securities commissions annual conference held in June 2009. a prominent judge. managing director of PIMCO.CHAPTER THREE 3.

These disagreements and lack of consensus among leading researchers in the field of EMH suggest the need for more research work to add to the existing body of knowledge.held up well during the crisis and that the market were a casualty of recession not the cause of it. 16 .

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