The Existence of Efficient Market Hypothesis (EMH) in the International Financial Markets

Resumen o Introducción

The Efficient Market Hypothesis (EMH) theory commonly referred to as the Random Walk Theory is one of the most debated topics in finance studies over the years because of the growing concerns that investors can trade on the available information so as to make abnormal profits in the market. EMH states that the price of a security (current stock prices) in the market reflects all the available information on its fundamental value at all times, hence investors cannot make any abnormal profits above the market prices using this information. EMH explains why changes in security prices occur and how those changes happen, hence very crucial to investors as they make their investment decisions in the security market. Many investors both domestic and global invest on securities that are undervalued as they expect their value to increase in the future. Other investors including investment managers also stress that they are able to choose those securities that can outperform the market prices with the core objective of gaining more profits. EMH argues that none of these assumptions is effective because the advantage gained is less than the transaction costs incurred such as research costs on the information hence not in a position to outperform the market price of these securities