Monday, September 23, 2019

Why Price Momentum Is Contrary to the Efficient Markets Hypothesis Assignment

Why Price Momentum Is Contrary to the Efficient Markets Hypothesis - Assignment Example The cash flow shocks, if embedded within the pricing, the price momentum can be observed. Or in a generalized manner, embedding any shock in the stock pricing implies the presence of price momentum.Shivakumar (2006) agrees that this phenomenon does seem contrary to the efficient market hypothesis, whereby, the hypothesis state that information is readily and equally available to all investors to ensure that the decision making of each is the differential amongst their strategy because the strategy is derived from information on which a decision is made. This concept is also agreed upon by Subrahmanyam (1998), Fama (1998) and Martin (2003) during their analytics on this model. Along similar lines, if information available to everyone is the same, then there is a consistency of information available in the market. Thus, a competitive environment shall prevail. However, this phenomenon exists in idealistic situations only, and on a general note, factors such as insider-trading, using pr ivileged information and so on do exist in markets globally. Subsequently, there are shockers – shocking news in the market – that prevail and the price of a stock fluctuates according to these shocks that can either be negative or positive; the former slides stock prices down, and the later carries it up, and the force that takes it up or down is known as the ‘price momentum’.Additionally, if the assumption of efficient market hypothesis would prevail, then equal information shall be available to all, and there would be presence of ‘shock absorbers’, because since an information would not just be available for certain individuals but for everyone, therefore, there would be not much of a shock for people to know about the case.

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