A Survey of Literature on Theory and Empirics of Efficient Market Hypothesis

Abstract

This survey organizes and summarizes existing theoretical and empirical seminal works on Efficient Market Hypothesis (EMH) for educational purposes. The theoretical models focus on random walk model which describes the behaviour of stock returns in an efficient stock market, that successive price changes are independent. The empirical implications of the theoretical model have been tested on the basis of types and forms of information available to an investor i.e. weak form, semi- strong form, and strong form efficiencies. The literature is almost unanimously in support of the random walk hypothesis for the weak form of efficient market hypothesis. On semi-strong form and strong form tests, the results are mixed. Especially for strong form whose tests are based on constructs that are not readily observed. The empirical survey of literature was extended to stock market anomalies which include calendar anomalies (such as day of the week effects, monthly (January) effects, and holiday effects), firm size effect, price/earnings ratio effect, momentum, book to market equity, and weather effect. Literature from this section revealed the existence of systematic discrepancies in returns corresponding with the various anomalies which is inconsistent with the theory of efficient market.