C/F/94. Validity of the Efficient Market Hypothesis

This paper presents the comprehensive analysis of the Efficient Market Hypothesis in the light of recent evidence. All three forms of market efficiency are discussed in the article with academic definitions and practical meaning. Then anomalies which are supposed to refute the Efficient Market Hypothesis are scrutinized. It is shown that absence of a model which could estimate normal returns may lead to spurious results and not necessarily mean that the Efficient Market Hypothesis is wrong. Moreover, the author illustrates other shortcomings of tests of market efficiency. Finally, he shows that even if the market is inefficient at the particular moment in time, eventually arbitrageurs will correct the situation and stock prices will come to their fair level. This paper will be useful for those who want to write about market efficiency with critical analysis of facts which clash with the Efficient Market Hypothesis.