This article is mainly does a thorough review of the efficient market from 1960′ to now. This article tries to discuss efficient market historically and theoretically. In the historical part, mainly introduce the theory development by timeline. And in the theoretical part, review the model of efficient market, and discuss some empirical research on the CAPM. The third part is maily about different ideas on efficient market, some criticism show up when the economy developing and the market becoming more and more mutual while there are also more and more problems revealed.
And then comes to the conclusion. The efficient market hypothesis (EMH) is one of the corner stone of modern financial economics. An efficient market is one in which securities prices reflect all available information. This means that every security traded in the market is correctly valued given the available information. The efficient market hypothesis (EMH) tests the assumption that stock markets reflect the available information in the stock prices. A market is said to be efficient with respect to an information set if the price ‘fully reflects’ that information set (Fama,1970), i.Order now
e. if the price would be unaffected by revealing the information set to all market participants (Malkiel, 1992). The efficient market hypothesis (EMH) asserts that financial markets are efficient. A market that incorporates available information into its prices is known to be efficient. The EMH also suggests that in efficient markets there is little or no scope for arbitrage opportunities as the market quickly adjusts to new information (Vasicek and McQuown 1972, pp. 71-84). This theory started with the largely unknown work of Louis Bachelier (A french mathematician).
However, at first there is not much attention has been allocated for this proposition until 1964 an American Economist, Samuleson proposed it again in his dissertation, with several controversies in his adoption. In 1965 Eugene Fama published his dissertation arguing for the random walk hypothesis. And then in 1970, Fama do several studies to prove the idea that could not reject the significant power of this theory. Jensen (1978) also believes that “There is no other theory with as much economical background as the Efficient Market hypothesis”.
Some studies depicts the market as an intelligent agent with an invisible hand (similar to the concept of Adam Smith) that is able to correct the speculative movements in price processes as described in Poterba and Summers (1988). This article will do a literature review on the efficient market hypothesis both historically and theoretically. And with the development of economy and study going further and further, there are different voices appear. Some critical point will also be discussed in this article.