Review the arguments and evidence for and against the efficient market Essay

Review the arguments and evidence for and against the efficient market hypothesis and discuss whether the recent financial crisis has caused the hypothesis irreparable damage - Essay Example The global financial crisis has made a huge impact on modern financial theory which was based on the hypothesis that the financial markets were more or less efficient. Many economists and writers were respected the efficient market hypothesis. Economists Robert Shiller touted EMH as the most important theory in the history of economics. This report will look at the implication of efficient market hypothesis in the functioning of the financial markets. It will focus the disadvantage of EMH and why some analyst wants to reject this hypothesis permanently. Efficient Market Hypothesis (EMH) is an investment theory in finance that states it is impossible to beat the market because the efficiency in the stock market leads to the reflection of all relevant information in the prices of shares. According to this theory, the trading of stocks always takes place at their fair values on every stock exchange. Hence it is impossible for investors to purchase stocks that are undervalued and also to sell stocks at a higher price than its fair market price. In this regard, it is not possible to outperform the return of the overall market through expert opinion on stock selection and also by timing the market. The theory also mentions that investors are left with only one way to obtain higher returns and it is through purchasing investments that are riskier in nature. The financial crisis of the year 2008-09 has left the economies of Europe and US vastly devastated. The rate of unemployment has reached very high and the economies in the US, Europe a nd also other countries are performing well below their economic capacity. The crisis has shaken the theory of efficient market hypothesis which assumes the existence of efficiency in every financial market. According to EMH, public information is reflected in the asset prices without any delay. It also suggests that the availability of any information which may affect the future price of any stock is already reflected in the