Market Efficiency and its implications for Macroeconomic Behaviour Essay

Market Efficiency and its implications for Macroeconomic Behaviour - Essay Example This paper studies all aspects of market efficiency and its implications for macroeconomic behavior. The behavioral economics challenged market efficiency hypothesis, which supposedly incorporates all information rationally, and instantly. The argument is based on that markets are not rational, but are driven by fear and greed. There were a lot of research in the cognitive neurosciences, which suggests that these two perspectives are opposite to each other. When money is put into the market, it is done with the aim of generating a return on the capital. Many investors try not only to make a profit but also to outperform, or beat, the market. According to the EMH, no investor has an advantage in predicting a return on a stock price . In order for a market to become efficient, investors must perceive that a market is inefficient and possible to beat. Investment strategies intended to take advantage of inefficiencies are actually keeping market efficient. Investment strategies intended to take advantage of inefficiencies are actually the fuel that keeps a market efficient. There are three identified classifications of the EMH: strong efficiency, semi-strong efficiency, and weak efficiency. The random walk theory asserts that price movements will not follow any patterns or trends and that past price movements cannot be used to predict future price movements. The debate about efficient markets has resulted in many empirical studies attempting to determine whether specific markets are in fact "efficient" and if so to what degree.