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Efficient Market Hypothesis-UK and US Markets

Introduction

The Efficient Market Hypothesis (EMH) has been an area of academic and professionalism emphasis for many decades (Augustas Degutis, 2014). Similarly, its aspect of semi-strong efficient has also been under scrutiny for several years (Wortstall, 2016). Therefore, this calls for investors to understand the trends in the capital markets to make informed decision. Alternatively, company executives need to have comprehensive knowledge of stock exchange markets for decision making to ensure that their organizations are perceived of value in the stock markets (Sewell, 2012) This is a Student Sample ORDER YOUR PAPER NOW

Defining   Semi-Strong Efficient

Semi-strong efficiency entails determining whether the stock prices portrays the reflection of the information available for the public (Augustas Degutis, 2014, p. 9). The definition of the semi-strong efficiency is coined and confined within the framework of the Efficient Market Hypothesis. Semi-strong form efficiency involves the calculation of the public information into current share price (Oprean, 2012, p. 183). This provides a clear indication that neither technical nor fundamental analysis can be applied to realize relatively higher gains. Therefore, the unavailable information to the public can be of benefit to the investors anticipating to earn much higher returns on investments.

London and New York Capital Markets Semi-Strong Efficient

In semi-strong efficient market the information available to the public reflects the current price of the stock in the market (Sewell, 2012). Both London and New York Capital markets portrayed the aspect of semi-strong efficient market once the news about the Britain exit from European Union broke out (Odendaal 2014). The stock prices in both markets drop rapidly from the strong efficient position to semi-strong efficient markets (Goodman, 2016). Despite the fact the two were the developed markets experiencing semi-strong from of market, before, during and after Brexit period they seemed to operate in semi-strong efficient market forms.

Comparison of Weak and Strong Form Efficiency in Respect to London and New York Stock Markets.

Weak form efficiency entails the usage of the historical information of the stock prices or returns themselves (Aatola, et al., 2010, p. 3). Besides, this form implies that the market is operating at efficiency as well as reflecting all the market information. Furthermore, it comprises both the semi-strong and weak forms of Efficiency Market Hypothesis (Sewell, 2012). Provided that stock prices are a true reflection of the available information for private and public investors, it becomes impossible for any investors to realize returns above the average investor if he or she was provided with the new information (Halberg, 2016).

During the Brexit period in Britain, the capital market of London experienced a lot of inefficiencies (Wortstall, 2016). The pound dropped in value in comparison with the dollar (Wortstall, 2016). This phenomenon did not end at that point but also it worsened when the majority of the Britain citizens voted for exiting the European Union (Goodman, 2016). This was new information to the markets which was not available in the first place. The studies indicate the new information gets incorporated into the stock market prices very fast and efficiently (Sewell, 2012, p. 166). However, this was not the case in London stock exchange market during the Brexit period. Wortstall (2016) noted that the test of London weak form efficiency using time series portrayed that the stock prices had zero autocorrelation when plotted against time. Again, before and after Brexit the market experienced semi-strong efficiency form. Therefore, it is quite evident that the Brexit situation has contributed a lot of inefficiencies in the London Capital Market as a phenomenon which is expected to continue.

Same as London market, Brexit also has had effects on the New York Capital Market. According to Goodman (2016), the exit of Britain from the European Union caused turbulences in the capital markets. The stock prices both in London and New York dropped sharply immediately Britain voted herself out of the European Union. For example, the value of shares in the American market fell by 3.6 percent. This scenario was attributable to the new information that threatened markets and hence caused inefficiencies as the markets got prepared to absorb the changing world order. As is it has been always the case, the outbreak of new information created a fall of the stock prices in the New York market. Additionally, the investors developed the strategy of escaping the changes in the market by focusing on the safest investments. In support Halberg (2016) noted that it was difficult for the New York Capital Market to counterbalance between its operations influenced by the supply and demand of the shares in the market. This resulted in the creation of an efficient market hypothesis of both weak and semi-strong efficient forms.

Conclusion

From the analysis of both London and New York Capital markets, it has come out clearly that the Efficient Market Hypothesis can occur in three different forms.  Strong and weak forms seem to dominate London and New York Stock Exchange Markets. However, despite the two markets operating under the conditions of both strong and weak forms, there is a possibility of them operating in the semi-strong efficient market. This because the capital markets are prone to changes as well as Efficient Market Hypothesis.  The new information is getting in the market as well as both public and private have access to the available information. This contributes to the creation of the semi-strong efficient market.  This is a Student Sample ORDER YOUR PAPER NOW

References

Aatola, P., Ollikka, K. & Ollikainen, M., 2010. Weak and Semi-Strong Forms of Informational Efficiency in the EU ETS Markets, Helsinki: University of Helsinki.

Augustas Degutis, L. N., 2014. The Efficient Market Hypothesis: A Critical Review Of Literature And Methodology. Ekonomika, 93(2), pp. 7-23.

Domm, P., 2016. How Brexit could stress out markets this week. [Online]
Available at: http://www.cnbc.com/2016/06/26/how-brexit-could-affect-markets-this-week.html
[Accessed 8 August 2016].

Egan, M., 2016. Brexit: How much will U.S. stocks drop?. [Online]
Available at: http://money.cnn.com/2016/06/14/investing/brexit-how-much-us-stocks-fall/
[Accessed 28 August 2016].

Goodman, P. S., 2016. Turbulence and Uncertainty for the Market After ‘Brexit’. [Online]
Available at: http://www.nytimes.com/2016/06/25/business/international/brexit-financial-economic-impact-leave.html?_r=0
[Accessed 26 August 2016].

Halberg, M., 2016. This Is How the Brexit Could Impact New York City Real Estate. [Online]
Available at: http://observer.com/2016/06/this-is-how-the-brexit-could-impact-new-york-city-real-estate/
[Accessed 26 August 2016].

Kottasova, I. & Petroff, A., 2016. This is Brexit: London and European stocks get crushed. [Online]
Available at: http://money.cnn.com/2016/06/24/investing/brexit-london-stocks-crashing/
[Accessed 28 August 2016].

Odendaal, G. R., 2014. The impact of earnings announcements on stock prices: An event study for the London Stock Exchange, London: European Business School.

Oprean, C., 2012. Testing the financial market informational efficiency in emerging States. Review of Applied Socio- Economic Research, 4(2), pp. 181-190.

Sewell, M., 2012. The Efficient Market Hypothesis: Empirical Evidence. International Journal of Statistics and Probability, 1(2), pp. 164-178.

Wortstall, T., 2016. Brexit, UK Financial Markets, And The Efficient Markets Hypothesis. [Online]
Available at: http://www.forbes.com/sites/timworstall/2016/02/22/brexit-uk-financial-markets-and-the-efficient-markets-hypothesis/#7e363c3363d0
[Accessed 26 August 2016].

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