Money and Banking in the Modern World

Money and Banking in the Modern World

exploit the market in order to gain higher returns. Prices poorly reflecting the true value of assets would in a way, defeat the purpose of stock markets since they are meant to be an accurate representation of a firm’s value. According to proponents of the efficient market hypothesis; equities prices efficiently reflect the true value of the asset. There are however several different degrees

1 According to semi-strong efficiency, share prices adjust immediately and in an unbiased way to new information as soon as it is available. This implies that stock prices do not gradually go up or down over time when new information is released, they adjust to the new level immediately without any time lag.2 The third form of the efficient market hypothesis is the strong form, according to which share prices also adjust to private information, implying that insider information would not result in the

Recently, academics have begun to use an even broader definition of the efficient market hypothesis. They claim that in the short run it is possible for equities to be poorly priced. According to this definition, the efficient market is one where an individual or entity cannot gain excess returns systematically since the market will adjust to correct such possible exploitations. Furthermore, it is claimed that in the long run prices adjust to reflect the true value of assets.4 However, what we will set out to do in this paper is take this broad definition of the efficient markets hypothesis and show, through past data and analysis that equities can often be poorly priced in the long run with them consistently misrepresenting information over a period of time.