EMH

Efficient
Market
Hypothesis
INEFFICIENT MARKET
The condition in the financial markets where the particular security’s price
does not trade at its true value. Hence, the market functions in a non- efficient
manner.

This non- efficient price of the tradable items occurs when a recent event/
news or speculation of an event/ news renders the market with less or higher
price of the securities or the tradable items compared with the actual or fair
value

-BY SYM, DKTE'S TEI, ICHALKARANJI

INEFFICIENT MARKET
For instance, wall Street Crash 1929 (Black Tuesday)

16 million shares were traded on the New York Stock Exchange in a single
day. The very next day, panic selling began and there were no buyers for the
stocks.

Since the investors could not assess the actual value of the stocks, the panic
followed through and this event eventually let to what is known as the Great
Depression.

-BY SYM, DKTE'S TEI, ICHALKARANJI

FACTORS LEADING TO
MARKET INEFFICIENCIES
External factors
 Market anomalies due to crisis
 Earning release

Internal factors
 Investor’s reaction to news
 Price speculation

-BY SYM, DKTE'S TEI, ICHALKARANJI

MARKET ANOMALIES DUE TO
CRISIS
Market anomalies arises due to the news updates (such as natural or man-
made crises).

For instance, the Ukraine- Russia war in 2022 is causing market anomalies
leading to the price of crude oil reaching an all-time high. This high price is
an anomaly since it is not equal to the fair value of crude oil.

On the contrary, FMCG is on the industries that is poorly affected owing to

the increase in the prices of key inputs in the products.

-BY SYM, DKTE'S TEI, ICHALKARANJI

MARKET ANOMALIES DUE TO
CRISIS
Russia and Ukarine together account for more than a quarter of global wheat
exports, while Ukarine alone makes up almost half of the exports of
sunflower oil. But because of the lack of exports in the war scenario, the key
inputs, i.e. wheat, sunflower oil have become expensive.

Consequently, the FMCG products have become expensive and the demand
for the same has gone down. Hence, the inflation has made the speculators
doubt the favourable returns of the FMCG sector leading to poor performance
in the market.

-BY SYM, DKTE'S TEI, ICHALKARANJI

EARNING RELEASE
Earning announcement is the information relating to the company’s
performance over a period.

If the announcement portrays strong earnings, the investors and traders

become optimistic about its performance and the stock prices go up and vice
versa.

-BY SYM, DKTE'S TEI, ICHALKARANJI

EARNING RELEASE
Lets assume, company P’s stocks are worth $40 but because of the current
earnings announcement (which is affected by a scenario such as war, tsunami,
etc) company P’s stock is trending at $20.

Here, the price is trending at a much lower price as compared to the actual
worth or value because of a temporary crisis. Conversely, the price can also
be trending at abnormal or artificially high rates because of a bubble.

Hence, that bubble will also be considered as market inefficiency.

-BY SYM, DKTE'S TEI, ICHALKARANJI

PRICE SPECULATION
Speculation of trades leads to market inefficiencies because ,in case of an
efficient market, the actual value is equal to the share price.

But, in case the trades speculate prices to go up or down in the coming time
because of an upcoming event (for instance, the election result), the
shareholders can buy or sell the shares accordingly. This can lead to market
inefficiencies.

-BY SYM, DKTE'S TEI, ICHALKARANJI

INVESTOR’S REACTION TO
THE NEWS OF CRISIS
Whenever a news makes an attempt on the valuation of tradable items, if the
investor reaction is delayed it leads to market inefficiency.

This delay in the reaction gives the opportunity to many traders to take such
positions that can give favourable returns. But, in this little window (until the
investors react and make the value equal to the price), huge losses can also
accrue if the speculation, followed by the news, goes wrong.

-BY SYM, DKTE'S TEI, ICHALKARANJI

INVESTOR’S REACTION TO
THE NEWS OF CRISIS
For instance, Dotcom bubble (1996-2001)
The dotcom bubble, or dotcom boom or internet bubble
It occurred in the 1990s as a result of excessive speculation that the firms
operating online are to witness massive growth in the coming time,
This expectation led to a tremendous amount of investment influx in the in
the internet-based firms despite the firms showing little to no growth
potential. Eventually, the dotcom bubble burst, leading to the economic
recession in 2001.

-BY SYM, DKTE'S TEI, ICHALKARANJI

EFFICIENT MARKET
HYPOTHESIS
The efficient market hypothesis (EMH) or efficient market theory

A hypothesis that states that share prices reflect to be able to value it

correctly.

Hence, it implies that the EMH believes that the stocks always trade at a fair
value on the exchange. Also, if the stocks’ prices are equal to their value,
there are no opportunities for the traders to buy an undelivered stock and sell
the same when the prices are inflated.

-BY SYM, DKTE'S TEI, ICHALKARANJI

IMPLICATION OF AN
EFFICIENT MARKET
In a perfect or efficient market scenario, it is impossible to beat the market by
selecting a stock with the potential to reach a higher price in the future.
The strategies that a trader/ investor can deploy here are:

 The risk- bearing strategy in which a higher risk can be taken in the expectation of a higher
return. But a higher risk implies that the risk of losses is also higher.

 Also, one must strategically diversify the investment across the stocks to maintain a
portfolio with stocks bearing different levels of risk. This kind of diversification can help in
case some stocks’ returns are more favourable than others.

-BY SYM, DKTE'S TEI, ICHALKARANJI

TYPES OF EFFICIENT MARKET
HYPOTHESIS

Weak Form Efficient Market Hypothesis

Semi- Strong Form Efficient Market Hypothesis
Strong Form Efficient Market Hypothesis

-BY SYM, DKTE'S TEI, ICHALKARANJI

WEAK FORM EFFICIENT
MARKET HYPOTHESIS

The entire past information is priced into securities in this form. Fundamental
analysis of securities can provide the information to produce returns above
market averages in the short term. But the fundamental analysis does not
provide a long-term advantage and technical analysis doesn’t work.

-BY SYM, DKTE'S TEI, ICHALKARANJI

SEMI- STRONG FORM EFFICIENT
MARKET HYPOTHESIS

Semi- Strong Form Efficient Market Hypothesis implies that neither

fundamental analysis nor technical analysis can provide any significant
advantage. It also suggests that new information is instantly reflected in the
price of the securities.

-BY SYM, DKTE'S TEI, ICHALKARANJI

STRONG FORM EFFICIENT
MARKET HYPOTHESIS

The entire information, both public and private, is reflected in the price of
stocks. Therefore, no investor can gain an edge over the market. Strong Form
Efficient Market Hypothesis does not say it’s impossible to get an abnormally
high return. That’s because there are always outliers included in the averages.

-BY SYM, DKTE'S TEI, ICHALKARANJI

THANK YOU

-BY SYM, DKTE'S TEI, ICHALKARANJI