Discussion Question

Efficient Market Hypothesis Student Name University Course Professor Name Date Efficient Market Hypothesis My Opinion of the Efficient Market Hypothesis The efficient market hypothesis holds that investors cannot generate abnormal returns because if the stock prices reflect all available information on the stocks, then there should be no advantage to any investor. The hypothesis was developed by Eugene Fama in 1965 and classified market efficiency into three categories: strong, weak, and semi-strong. However, investors in the stock markets still make profits, and others make losses. My opinion of the efficient market hypothesis is that it fails to account for the abnormalities in the stock market and assumes that all investors will be trading on the available information. The basis for my opinion on the efficient market hypothesis is that investors still profit from the stock market. The main question is how it is possible that, in an efficient market, some people can make a profit. Such a question can be approached from several angles. Firstly, it is possible that the stock market is inefficient and that some investors can take advantage of existing inefficiencies to make profits. Secondly, not all traders are rational, meaning some do not make rational decisions based on available information. Existing literature and observations of the stock market movements can justify both angles. Regarding abnormalities or inefficiencies, a stream of research explores market anomalies and their effect on the stock market. However, it is essential to note anomalies in the finance literature on various finance frameworks, including the capital asset pricing framework (CAPM) and the efficient market hypotheses. Among the most common anomalies outlined by Ahmed (2020) include the size effect, value effect, momentum effect, the limits of arbitrage, the January effect, and the weekend effect. The anomalies are significant enough to allow investors to make abnormal profits. For example, the value effect expresses that firms with high earnings-to-price (E/P) rati...