Equity Markets and Portfolio Analysis

CHAPTER 15 Efficient Markets

Introduction

One of the most influential theories to emerge out of the finance literature over the last 50 years is the efficient market hypothesis (EMH). Introduced by Burton Malkiel in the 1960s, the EMH precipitated a considerable amount of controversy between proponents of the EMH (primarily academicians) and practitioners who employed fundamental and technical analysis. EMH proponents argued that if the market consisted of a sufficient number of fundamentalists, then their actions would force the market price of a security to its equilibrium value. For example, if a security was underpriced, the fundamentalists would try to buy the security, pushing its market price toward its equilibrium value. In contrast, ...