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We have organized three implications for EMH and AMH. The first implication that we considered is the relations between risk and reward, we believe they may not to be stable over time. In the fact, the several factors exist could affect the relations between risk and reward, such as the regulatory environment and tax laws, as follow these factors changing over time, any risk and reward have possible to be affected. In the context of rational expectation equilibrium model, if “risk preference” changes, meanwhile, the “equity risk premium” also must change.
However, in the AMH, the aggregate risk preference will never change constant, because of the pressure of natural selection. According to the example from Lo (2004), in the US market, there has a group who never experience a genuine bear market, but that shaped the risk preferences of the US economy. This case affected current investors same as the past technology bubble, experienced technology bubble’s investors, they may prefer leaving the market, but today’s investors are entirely different with past years. Moreover, Lo (2004) emphasizes there also have several researchers have developed around this issue, such as economics and finance, psychology, operations research, brain and science, these further to interpret how individuals make decisions. The second implication is the arbitrage opportunity exists frequently in AMH that is different with EMH. In the context of Grossman and Stiglitz (1980) indicated, if they’re without the opportunity, no profit, gathering information will not exist in the market, and the financial market will collapse. As the idea of evolutionism through the financial market implies the profit opportunity should exist in the market.
However, the appearance of new perspective sometimes imply the old perspective die out, that looks like the new opportunity born. Lo (2004) accepts the perspective of AMH considered the market is complex that involves many phenomena, such as fear, bubbles, crashes and others, rather than the EMH predicted higher efficiency trend. The third implication is innovation that is an important skill for surviving in the financial market. In the EMH perspective, if investors want to achieve the levels of expected returns, as long as they could hold the same levels of risk. However, the AMH has a different perspective with EMH, in the context of AMH has mentioned the relations between risk and reward will changes with time that implies if investors want to achieve better-expected returns, adopt the market changing is the inevitable step. But the multiple abilities develop will not make the investment manager die out in the financial market. Overall, this essay has identified the main characteristics with EMH and AMH and explained their implications in the financial market.
Firstly, we have understood the classical efficient market hypothesis, and try to interpret the criticisms of the efficient market hypothesis and behavioral, we can clearly recognize the strength and weakness of the EMH. Turn to the adaptive market hypothesis, we find the AMH correlates with an evolutionary perspective, psychological, and others, it has more complete explanations of financial behavior market, and it recognizes the complex in human behavior, in particular when individuals make decisions that related with many elements. In contrast, the implications between EMH and AMH, we forward find out whether EMH and AMH, they have their own perspectives to face the market.
As Lo (2004) illustrate the story: “five blind people, blind from birth, encounter an elephant for the first time, the first blind people felt the elephant’s leg like a three, the second blind people felt the elephant’s trunk like a snake, so on.” Through the story, we cannot say the individuals’ perspectives are wrong but that we can determine that is not complete. Similarly reason between EMH and AMH, the efficient market hypothesis contributed reasonably principles to the financial market, but fewer evidence around behavioral principles. The adaptive market hypothesis provided compositive and logically principles to the financial market, and it has more complete evidence to interpret the perspectives and the market conditions. Therefore, whether the EMH or AMH their perspectives and contributions for financial market and economics should be honored in the world.
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