ARTICLE REVIEW

EFFICIENT MARKET HYPOTHESIS (EMH):

PAST, PRESENT AND FUTURE.

Name

: Hani Kalsom Binti Hashim

Course

: AGW 723
Seminar in Financial Decision Making

Lecturer

: Prof. Datin Ruhani Ali

Article Title: Efficient market hypothesis (EMH): past, present and future.
Yen, G., & Lee, C. F. (2008). Efficient market hypothesis (EMH): past, present and
future. Review of Pacific Basin Financial Markets and Policies, 11(02), 305-329.
Authors: Gili Yen and Cheng-few Lee.
Journal: Review of Pacific Basin Financial Markets and Policies.
Publication Information: 2008, Volume 11, Issue 2, Page Numbers 305-329.
Publisher Information: World Scientific Publishing Co. c and Center for Pacific
Basin Business, Economics and Finance Research Efficient.
Keywords: Efficient market hypothesis (EMH); historical origin of the EMH; empirical evidence bearing on the EMH; overall assessment of the EMH.
Abstract and Overview
Author had review the all empirical finding from the methodological perspective since
1960s through 1990s focus on the EMH under the title supporting empirical findings
as documented in 1960s, mixed empirical findings as merged in the late 1970s
through 1980s and challenging empirical findings as appeared in 1990s. The
authors then draw the current issues based on empirical evidence available and then
present an overall assessment of the EMH. All the issues and wary explanations are
taken into consideration, the authors conclude that the EMH will remain where it is
and will remain playing an important part in modern finance till the end. Above all, at
the first place, author had explicated the Efficient Market Hypothesis from it
chronological origin of the Efficient Market Hypothesis (EMH).
Purpose of the study
To study the efficiency of capital market information and to review conceptual
formulations, testing methods, and empirical findings associated with the notion of
EMH.
1

In brief is to justify the capabilities of stock market in handling the newly arrived
information in a systematic way to the extent of the movements in stock prices are
concerned.
Problem addressed by the study
Concerned about the efficiency of capital market information considering the views
from the proponents who believe the capital market possesses full information
efficiency or from the opponents who believe the capital market possesses only
limited information, author reviewed all the empirical finding to conclude whether the
capital market is fully efficient, or only partially efficient or totally inefficient.
Research Question
1.

What patterns of empirical findings emerged over the past five decades?

2.

Why did such a change in patterns of empirical findings occur over the course

of time?
3.

In what ways did the researchers use the empirical evidence to provide

support for the EMH, or, to launch challenge against the EMH?
4.

Why did the behavioral school argue forcefully that the traditional CAPM-

framed research paradigm be replaced by a new behavior- oriented research

paradigm?
5.

How do the proponents of the EMH launch a relentless counter-attack on the

newly emerged behavioral school?

6.

Why does the EMH remain as a powerful and useful notion in modern

finance?
The sample in the study
Author using the EMH empirical finding from the methodological perspective since
1960s through 1990s focus on title supporting empirical findings as documented in
1960s, mixed empirical findings as merged in the late 1970s through 1980s and
challenging empirical findings as appeared in 1990s.
The method in the study
2

Author describes briefly the historical origins of the EMH to clearly describe how
testable implications drawn from the EMH are later developed. Then author provides
a chronological review of empirical evidence in last five decades bearing on the EMH
from methodological perspective under salient headings so that the readers can
grasp the thrust of the heated debate and capture how the nature of debate evolves
over time between the pros and the cons of the EMH and what are the
methodological issues involved. Finally, author provides an overall assessment of
the huge body of empirical studies on EMH to assist readers on making an educated
guess as to in which direction the EMH might be headed for. The research been
organized in the following manner:
a.

Section 1 consist of introductory materials.

b.

Section 2 defines the historical origin and the development of

hypothesis formulation of the EMH.

c.

From Sections 3 over 5, consist of empirical evidence bearing on the

EMH based on a careful review of representative surveys, journal articles,

books, and book reviews will be presented under three headings:
(1)

Supporting empirical evidence on the EMH in 1960s is reviewed

in Section 3.
(2)

Mixed empirical findings for and against the EMH in the late

1970s through 1980s are summarized in Section 4.

(3)

Challenging empirical evidence against the EMH as appears in

1990s is provided in Section 5.

(4)

Section 6, the present survey makes an overall assessment of

the EMH, including the ongoing debate in the 21st century with regard
to the EMH, to conclude the paper.
The discussions are predominantly addressed to the stock market based on 3
assumptions which are:
a.

The pioneering researchers in this area have documented the price

behavior of the stock market to advance the ideas of information

b.

efficiency.
Stock market in a large number of societies is the earliest developed
and remains to be the predominant capital market among many
societies to date.

c.

Stock, with its associative price movements as a means of transmitting

financial information, shares similar characteristics with other financial
instruments. So the inferences drawn from the observed empirical
patterns of the stock markets are equally applicable to other types of
financial instruments as well.

Conclusions
1.

Based on empirical finding using return generating model (CAPM) possesses

limited differentiating power. Thus, the capital market possibly will not possess
information efficiency as advanced by the notion of EMH. Distinguishing that the
capital market possibly will only partly satisfy the concept of EMH, it helps if the
researchers try out several base and/or observation periods to provide an internal
robustness check on their empirical findings.
2.

To test EMH using CAPM, information-free pre-event base period need to be

choose because of their abilities in interpreting the meaning of the empirical findings
and prevent from quagmire of interpreting empirical finding.
3.

Current burning issues that been discussed are whether to persist of the EMH

or replaced with behavioral finance paradigm. The suggestion from Malkiel (2003) is
to look out for further empirical studies which can help differentiate those
contradictory views.
4.

Author is hoped that readers at this stage have a fairly good understanding of

conceptual formulations, testing methods, and empirical findings associated with the
notion of EMH.
5.

Author agreed that even though the capital market is inconsistent, but the

most efficient market in its capability of processing information. After taking into
consideration necessary reservations and exercising precautionary interpretations,
chances are that the EMH will remain playing an important role for years to come.