In preparation for this week’s discussion, students should read pages 335–341, chapter 12, in the course textbook. They should also study a number of the academic articles relating to market efficiency that are identified in footnotes to this reading.
Question: How efficient are capital markets? Explain.
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The efficiency of capital markets has been a longstanding topic of debate among academics and practitioners. The efficient market hypothesis (EMH) proposes that capital markets are efficient, meaning that security prices fully reflect all available information. This implies that investors cannot consistently earn abnormal profits by using public information to buy undervalued securities or sell overvalued ones.
The efficiency of capital markets has been supported by several empirical studies. For instance, the study by Fama (1970) found that stock prices in the US follow a random walk, indicating that past stock prices cannot predict future stock prices. Another study by Malkiel (1995) found that professional fund managers cannot consistently beat the market, implying that the market is efficient.
However, other studies have shown that markets may not always be efficient. For example, several studies have documented the existence of…NEED A COMPREHENSIVE ANSWER? POST YOUR ORDER
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