Efficient market hypothesis

Every investor has to develop a portfolio strategy which will best suit his investment objectives. Portfolio strategies can be either active or passive. Passive portfolio strategy (often known as a buy-and-hold strategy) does not require additional inputs, such as return forecasting. Its main investment objective is to follow the performance of the benchmark index [5]. Passive strategy is the purest implementation of the efficient market hypothesis (EMH) as it assumes that markets will be able to reflect all available information in the stock prices. 

Malkiel, B. G. 2003. The efficient market hypothesis and its critics. Journal of Economic Perspectives 17(l) 59-82. 

There are many arguments for the rational-expectations hypothesis. In the simple cobweb cycle, and even with adaptive expectations, we must assume that each agent believes himself to be the only one to adjust rationally to the circumstances and that others act in a more or less mechanical way But this is an irrational belief, which we should not impute to people without evidence. It is surely more plausible to assume that people believe others to be as rational as themselves. Also, in a rapidly changing world people would be silly to pay much attention to the past. When oil prices quadrupled in 1973, the prices of oil before 1973 lost all relevance as guides to future prices. And if ordinary people understood much less of the economy than economists do, we would expect the latter to make much more money than they in fact do. The reason economists don t make a killing by outguessing the market is that the market has access to whatever information they have and can use it just as efficiently. ... 

The lead market concept is based on three hypotheses (1) market opportunities for an innovation are nation-specific because market contexts vary from country to country (2) particular characteristics of a nation s market context increase title probability that innovation designs that are initially adopted in this country are adopted worldwide and (3) nation-specific demand and the national market context needs can be perceived more efficiently by domestic firms. The second hypothesis represents the core of lead market theory and is the focus of the theoretical (chapter 3) and empirical (chapter 4) work of this thesis. The first hypothesis is a prerequisite and will be based solely on literature (chapter 2), while the third hypothesis aims at lead markets as the locus of companies innovation activiticjs, in the last consequence the location of R D (chapter 5). 

The thesis follows the traditional structure of analysis analysis of existence of lead markets, analysis of contingency of lead markets and analysis of efficiency of lead markets. The hypothesis of existence is that there are lead markets for a broad range of innovations. The hypothesis of contingency is that several systematic nation-specific demand and market conditions can be identified that facilitate the international diffusion of innovation designs domestically preferred. These are combined in five lead market factors. The hypothesis of efficiency is that multinational firms can promote the global success of their innovations in concentrating the innovation development activities in the respective lead markets. 

---