The Efficient Market Hypothesis on Trial: A Survey by Philip S. Russel and Violet M. Torbey
Abstract:
The hitherto dominant paradigm in financial market research, the Efficient Market Hypothesis (EMH), has been put on trial recently and subjected to critical re-examination. The preliminary evidence indicates that the initial confidence in the Efficient Market Hypothesis might have been misplaced. It is observed that financial equilibrium models based on EMH fail to depict trading operations in the real world. Various anomalies and inconsistent results call for refinement of the existing paradigm. It is proposed in this article that a more coherent theory of stock market behavior can be developed by incorporating Keynesian ideologies on the speculative behavior of investors.
This essay is organized as follows: The first section provides a brief historical perspective on EMH. In this section it is observed that the initial euphoria about the EMH has waned and that conflicting opinions on market behavior have provided the impetus for the current debate. The next section identifies some market anomalies and the resultant alternate theories for explaining market behavior. The third section provides Keynes' perspective on stock market behavior. A short summary followed by some directions for future research concludes the paper.
Conclusion:
Undoubtedly, the studies based on EMH have made an invaluable contribution to our understanding of the securities market. However, there seems to be growing discontentment with the theory. A limited survey of the contemporary literature shows that criticism of EMH has gained both voice and momentum during recent years. While it is true that the market responds to new information, it is now clear that information is not the only variable affecting security valuation. Recent years have witnessed a new wave of researchers who have provided thought provoking, theoretical arguments and supporting empirical evidence to show that security prices could deviate from their equilibrium values due to psychological factors, fads, and noise trading
