A Critical Review of the Market Efficiency Concept
The market efficiency hypothesis has attracted a notable number of economists to conduct investigations in this field. It could be considered as an effective method of driving investors towards the right direction while trading in the security market. A large number of researches believe that the market is efficient in some of its forms, while others take a different view. Drawing on previous theoretical and empirical studies investigating market efficiency and its three forms, this paper critically examines the concept of market efficiency through a critical review from different points of views. Moreover, it highlights a number of empirical tests and their results with regard to the three forms of market efficiency. It also focuses on the influence of market efficiency on the security prices. This paper concludes that the market seems to be more efficient in regards to its weak form instead of the strong and semi- strong forms, as a result, it is difficult to predict future security prices and obtain abnormal profits by only analyzing historical records.
Keywords : Critical Review; Market Efficiency; Security Prices
- Angelovska, J. (2018). Testing weak form of stock market efficiency at the macedonian stock exchange. UTMS Journal of Economics, 9(2), 133-144.
- Arnold, G. (2012). Modern Financial Markets & Institutions. Pearson Higher Ed.
- Barnes, P. (2016). Stock market efficiency, insider dealing and market abuse. CRC Press.
- Bodie, Z., Kane, A. and Marcus, A. J. (2011). Investments and Portfolio Management. New York: McGraw-Hill.
- Brealey, R. A., Cooper, I. A., & Habib, M. A. (2020). Cost of capital and valuation in the public and private sectors: Tax, risk and debt capacity. Journal of Business Finance & Accounting, 47(1–2), 163–187.
- Brealey, A., Richard. (2016). Principles of Corporate Finance. 12th ed. New York, NY: McGraw- Hill.
- Chun, S., and Kim, S. (2004). Case study in forecasting a stock market. Journal of Expert Systems, 21 (4), 192-207.
- Ghazani, M. M., & Ebrahimi, S. B. (2019). Testing the adaptive market hypothesis as an evolutionary perspective on market efficiency: Evidence from the crude oil prices. Finance Research Letters, 30, 60–68.
- Groenewold, N. and Kang, K. C. (1993). The Semi-Strong Efficiency of the Australian Share Market. The Economic Record, 69(4), 405--410. doi.org/10.1111/j.1475-4932.1993.tb02121.x
- Gupta, R., & Basu, P. K. (2007). Weak form efficiency in Indian stock markets. International Business & Economics Research Journal (IBER), 6(3). https://doi.org/10.19030/iber.v6i3.3353
- Hirano, Y., Pichl, L., Eom, C., & Kaizoji, T. (2018). Analysis Of Bitcoin Market Efficiency By Using Machine Learning. CBU International Conference Proceedings, 6, 175–180.
- Ito, M., Noda, A., & Wada, T. (2016). The evolution of stock market efficiency in the US: A non-Bayesian time-varying model approach. Applied Economics, 48(7), 621–635.
- Jarrow, R. A., & Larsson, M. (2012). The meaning of market efficiency. Mathematical Finance: An International Journal of Mathematics, Statistics and Financial Economics, 22(1), 1–30. https://doi.org/10.1111/j.1467-9965.2011.00497.x
- Kharbanda, V., & Singh, A. (2018). Futures market efficiency and effectiveness of hedge in Indian currency market. International Journal of Emerging Markets. 13(6), 2001-2027. https://doi.org/10.1108/IJoEM-08-2017-0320
- Malafeyev, O., Awasthi, A., & Kambekar, K. S. (2017). Random walks and Market Efficiency in Chinese and Indian equity markets. Retrieved from https://ArXiv Preprint ArXiv:1709.04059.
- Malkiel, B. G. (2003). The efficient market hypothesis and its critics. Journal of Economic Perspectives. 17(1), 59–82.
- Malkiel, B. G. and Fama, E. F. (1970). Efficient Capital Markets: A Review Of Theory And Empirical Work. The journal of Finance, 25 (2), 383—417. https://doi.org/10.2307/2325486
- Nwachukwu, J. C., & Shitta, O. (2015). Testing the weak-form efficiency of stock markets. International Journal of Emerging Markets. 10(3), 409-426. https://doi.org/10.1108/IJoEM-07-2013-0115
- Pilbeam, K. (2010). Finance & Financial Markets. Hamshire: Palgrave Macmillan.
- Poshakwale, S. (1996). Evidence on Weak Form Efficiency and Day of the Week Effect in the Indian Stock Market. Finance India. 10(3), 605-616. https://doi.org/10.19030/iber.v6i3.3353
- Potocki, T., and Swist, T. (2012). Empirical Test of the Strong Form Efficiency of the Warsaw Stock Exchange: The Analysis of WIG 20 Index Shares. South-Eastern Europe Journal of Economics. 2(2) pp.155-172. https://doi.org/10.1086/296593
- Rabbani, S., Kamal, N., and Salim, M. (2013). Testing the Weak-Form Efficiency of the Stock Market: Pakistan as an Emerging Economy. Journal of Basic and Applied Scientific Research. 3(4), 136-142. https://doi.org/10.1108/IJoEM-07-2013-0115
- Rahman, M. S., Simon, H. M., & Hossain, M. M. (2016). An empirical analysis of weak form market efficiency: Evidence from Chittagong stock exchange (CSE) of Bangladesh. Journal of Statistics Applications & Probability. 5(3), 535–542.
- Rösch, D. M., Subrahmanyam, A., & Van Dijk, M. A. (2017). The dynamics of market efficiency. The Review of Financial Studies. 30(4), 1151–1187.
- Rosenthal, L. (1983). An empirical test of the efficiency of the ADR market. Journal of Banking & Finance. 7(1), 17–29.
- Shiller, R., (2003). From Efficient Market Theory to Behavioural Finance. Journal of Economic Perspectives. 17(1), 83-104. https://10.1257/089533003321164967
- Singer, A. (2018). Justice failure: Efficiency and equality in business ethics. Journal of Business Ethics, 149(1), 97–115.
- Sornette, D., and Woodard, R. Corrnell University Library. (2011). Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis. [Online] Available at: http://arxiv.org/abs/0905.0220 [Accessed on 31 December 2013].
- Syed, A. M., & Bajwa, I. A. (2018). Earnings announcements, stock price reaction and market efficiency–the case of Saudi Arabia. International Journal of Islamic and Middle Eastern Finance and Management. 11(3), 416-431. https://doi.org/10.1108/IMEFM-02-2017-0044
- Verheyden, T., De Moor, L., & Vanpée, R. (2016). Mutual fund performance: A market efficiency perspective. Investment Analysts Journal, 45(1), 1–15.
- Zhang, Y., Chan, S., Chu, J., & Sulieman, H. (2020). On the Market Efficiency and Liquidity of High-Frequency Cryptocurrencies in a Bull and Bear Market. Journal of Risk and Financial Management, 13(1), 8-17.