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A Literature Review of the Efficient Market Hypothesis

Author

Listed:
  • Bachar FAKHRY

    (University of Bedfordshire Business School, UK.)

Abstract
The efficient market hypothesis and behavioural finance theory have been the cornerstone of modern asset pricing for the past 50 odd years. Although both theories are fundamental in explaining modern asset pricing, they are opposing views. The efficient market hypothesis dictates that the price of any asset depends on the information, while the behavioural finance theory dictates that the price depends on the reaction of the market participants to the information. Therein lays the key to the argument influencing modern asset pricing, does price immediately reflect the information or market participants’ perception of the information. In this paper, we will critical evaluate the theory influencing the efficient market hypothesis. We will review the neoclassical economics underpinning the efficient market hypothesis and the recent empirical evidence. In concluding, we find that although the efficient market hypothesis has difficulties in testing and the empirical evidence is mixed. Yet it is useful as a benchmark for regulators and central bankers alike. However, market participants are homo sapiens and not homo economics; hence there is a requirement to understand their reaction. So in essence leading to a requirement to include the behavioural finance theory, if we are to understand asset pricing.

Suggested Citation

  • Bachar FAKHRY, 2016. "A Literature Review of the Efficient Market Hypothesis," Turkish Economic Review, KSP Journals, vol. 3(3), pages 431-442, September.
    • Handle: RePEc:ksp:journ2:v:3:y:2016:i:3:p:431-442
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    References listed on IDEAS

    as
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    Cited by:

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    2. Ashok Chanabasangouda Patil & Shailesh Rastogi, 2019. "Time-Varying Price–Volume Relationship and Adaptive Market Efficiency: A Survey of the Empirical Literature," JRFM, MDPI, vol. 12(2), pages 1-18, June.
    3. Antonio J. Dayag & Fernando Trinidad, 2019. "Price-Earnings Multiple as an Investment Assessment Tool in Analyzing Stock Market Performance of Selected Universal Banks in the Philippines," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 8(4), pages 17-33, July.
    4. Minea Elena Loredana, 2019. "A Critical Theoretical Analysis On The Implications Of Efficient Market Hypothesis (Emh)," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 6, pages 298-303, December.
    5. Zhiyong Zheng & Jian He & Yingjie Yang & Mengting Zhang & Desheng Wu & Yang Bian & Jianhong Cao, 2023. "Does financial leverage volatility induce systemic financial risk? Empirical insight based on the Chinese fintech sector," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 1142-1161, March.

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    More about this item

    Keywords

    Efficient market hypothesis; Behavioural finance theory; Neoclassical economics;
    All these keywords.

    JEL classification:

    • B13 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Neoclassical through 1925 (Austrian, Marshallian, Walrasian, Wicksellian)
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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