Here is the brief presentation about market efficiency and EMH

3. Market Efficiency and EMH
By Group “A”

4. Presented By
Kashif Hussain

5. Contents
• Market Efficiency An Introduction
• Market Efficiency for Investors
• Necessary Conditions for Market Efficiency
• Implications and Non Implications of MF
• Efficient Market Hypothesis
• The internal Contradiction
• Problems with EMH
• Conclusion

6. Market Efficiency
• If markets are, in fact, efficient, the market price is the best
estimates of value, and in the process of valuation you will
have justify the market price.
• If markets are not efficient, the market price may deviate
from the true value, and the process of valuation is directed
towards obtaining a reasonable estimate of this value.

7. Efficient Market
• Efficient market is one where the market price is
an impartial estimate of the true value of the investment.
• Market efficiency does not require that the market price
be equal to true value at every point in time. All it requires
is that errors i.e. difference in the market price should be
unbiased, i.e., that prices can be greater than or less than true
value, as long as these deviations are random.

8. Continue……..
• The fact that the difference from true value are random
implies, in a rough sense, that there is an equal chance that
stocks are under or overvalued from its actual value at any
point in time, and that these deviations are not correlated
with any other variable that determine the stock value.
• If the difference between market price and true value are
random, it follows that no group of investors should be able
to consistently find under or over valued stocks using any
investment strategy.

9. Market Efficiency in the Investment Perspective
• It is extremely unlikely that all markets are efficient to all
investors, but it is entirely possible that a particular
market (for instance, the New York Stock Exchange) is
efficient with respect to the views of the average investor.
• It is also possible that some markets are efficient while
others are not, and that a market is efficient with respect to
some investors and not to others.

10. Continue……
• Definitions of market efficiency are also linked up
with assumptions about what information is available to
investors and reflected in the price.

11. Necessary conditions for market efficiency
• The market inefficiency should provide the basis for a
scheme to beat the market and earn excess returns. For this
to hold true.
• There should be profit maximizing investors

12. Implications of market efficiency
• One of the main implications of Market Efficiency is that no
investor group that intends to take advantage of market by
beating will not be able to do so on a consistent basis even if
they use an expert investment strategy. This implies for both
expert and average investors.
• An efficient market would also carry very negative
implications for many investment strategies and actions
that are taken for beating the market and hence getting the
desired returns.

13. Non Implications of Efficient Markets
• There will be no difference between stock prices and its true
value.
• No investor will 'beat' the market in any time period.
• No group of investors will beat the market in the long term.

14. Basic Stock Investing
• In Stock Market We have :
• Good News
• Bad News

15. Requisites for EMH
• Fundamental Analysis
• Technical Analysis

16. Examples of Good News
• Good Sales Reports
• Income Reports
• Profit Reports etc.

17. The Story of Bob and Bill

18. What Happens Here?
• Bob Learns Good News.
• At First He only tells his buddy bill
• Bill buys the stock in advance at low rate
• Bob public the News
• The Stock Prices Goes
• Bill Gets rich quick by Selling the stock at high prices to investors like
Grandma who knows the News later

19. Strong Form of EMH
• At anytime anyone and everybody already knows all the relevant
information about a stock price as the information flows super quickly.
• Nobody Can Earn Money by Using Any Information to analyze and
Predict Future Prices Movements. This means that bill can’t beat
grandma with use of information.
• It is useless to use insight information, Fundamental Analysis, or
Technical Analysis to give you an advantage in stock investing.

20. Weak Form of Efficiency
• The Information Does not Flow Freely and quickly so the insiders have
a big unfair advantage by knowing the information prior to other
investors.
• Fundamental analysis can help you predict stock prices.
• Same is the case with insider Information.
• Technical analysis are still not effective.

21. Semi Strong Form of Efficiency
• The semi-strong form of EMH assumes that current stock prices adjust
rapidly to the release of all new public information.
• Excess returns cannot be achieved using technical as well as
fundamental analysis
• Only Insider Information may be useful

22. Efficient Markets and Profit-seeking investors: The Internal
Contradiction
• There is an internal contradiction in claiming that there is no
possibility of beating the market in an efficient market and then
requiring profit-maximizing investors to constantly seek out ways of
taking benefits and advantages from the market and thus making it
efficient.
• If markets were, in fact, efficient, investors would stop looking for
inefficiencies, which would lead to markets becoming inefficient
again.
• It makes sense to think about an efficient market as a self-correcting
mechanism, where inefficiencies appear at regular intervals but
disappear almost instantaneously as investors find them and trade on
them.

23. Problems with EMH
• Since investor’s value stocks differently, it is impossible to ascertain
what a stock should be worth under an efficient market.
• According to the EMH, if one investor is profitable, it means the entire
universe of investors is profitable. In reality, this is not necessarily the
case.
• Under the efficient market hypothesis, no investor should ever be able
to beat the market, While the reality is there are lots of investors who
can actually beat the market with their sound strategies

24. Conclusion
• It's safe to say the market is not going to achieve perfect efficiency
anytime soon. For greater efficiency to occur, the following criteria
must be met: (1) universal access to high-speed and advanced systems
of pricing analysis, (2) a universally accepted analysis system of
pricing stocks, (3) an absolute absence of human emotion in
investment decision-making, (4) the willingness of all investors to
accept that their returns or losses will be exactly identical to all other
market participants. It is hard to imagine even one of these criteria of
market efficiency ever being met.

25. References
• Ball, Ray. “The Theory of Stock Market Efficiency: Accomplishments and Limitations.”Journal of Applied
Corporate Finance8, no. 1 (Spring 1995).
• Banz, R. W. “The Relationship between Return and Market Value of Common Stocks.”Journal of Financial
Economics9, no. 1 (March 1981).
• Barry, Christopher B., and Stephen J. Brown. “Differential Information and the Small Firm Effect.”Journal of
Financial Economics13, no. 2 (June 1984).
• Basu, Senjoy. “Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of
the Efficient Market Hypothesis.”Journal of Finance32, no. 3 (June 1977).
• Berkowitz, Stephen A., Louis D. Finney, and Dennis Logue. The Investment Performance of Corporate Pension
Plans.New York: Quorum Books, 1988.
• Bernard, Victor. “Capital Markets Research in Accounting During the 1980s: A Critical Review,” in The State of
Accounting Research as We Enter the 1990s,Thomas J. Frecka, Ed. Urbana: University of Illinois Press, 1989.
• Bernard, Victor L., and Jacob K. Thomas. “Post-Earnings–Announcements Drift: Delayed Price Response or Risk
Premium?”Journal of Accounting Research27, Supplement (1989). Fama, Eugene F. “Efficient Capital Market:
II.”Journal of Finance46, no. 5 (December 1991). Hawawini, Gabriel. European Equity Markets: Price Behavior
and Efficiency,Monograph 1984-4/5.

26. Continue….
• Monograph Series in Finance and Economics, Salomon Brothers Center for the Study
of Financial Institutions, Graduate School of Business, New York University, 1984.
• Zvi Bodie, Alex Kane, & Alan J. Marcus Investment and portfolio management , 9th
Edn revised, McGraw Hill Higher Education, 2011
• Eugene F. Fama, “Efficient Capital Markets: A Review of Theory and Empirical
Work,”Journal of Finance25, no. 2 (May 1970): 383–417.