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Market efficiency - Essay Example

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Market efficiency

There are various forms or degrees of market efficiency which exists. These comprise of strong market efficiency, semi-strong market efficiency and the weak form market efficiency (Ho & Yi, 2004; p. 57). Acknowledging the efficient market hypothesis in its simplest and purest form might be hard; nevertheless there are three main types of efficient market hypothesis which have the purpose of reflecting the extent to which it can be used in the security markets. First is the strong-form efficiency which is the strongest form and it states that all information and facts in the market, whether in the public or private hands is incorporated in the stock prices. There is no insider information that might grant the investor an extra advantage (Cataldo, 2003, p. 27). Secondly, there is the semi-strong efficiency form of efficient market hypothesis. This asserts that all public information present in the market is used in the derivation of the stock’s present price. In this form of efficiency fundamental and technical analysis cannot be applied to achieve better profits for the investor. Lastly, there is the weak form efficiency which alleges that all historical prices of a security are replicated in the current stock’s price. Thus, technical analysis cannot be of any use in predicting the future stock’s price and eventually beating the market (Basse & Bassen, 2010; p. 51). Part II Evaluation of the Market Efficiency The nature and type of information is not required to be constrained to financial news and studies only. As a matter of fact political news economic news and news regarding social events merged with the way the investors incorporate such information, whether it might be true or mere rumors, will be replicated in the securities prices. According to the theory of the efficient as prices react to similar information there is no investor who will be in a position to earn superior profits over the other. This kind of observation is seen in strong form efficiency where all available public information is incorporated in the stock’s price (Zhang, 2008; p. 66). Using the random Walk theory asserts that in any efficient market, prices normally become unpredictable such that they are random. In this respect, there is no investment trend that can be detected in such a manner that any predetermined approach to investing in the stock might not be that profitable. This type of ‘Random Walk of stock’s prices described in the school of thought of the efficient market hypothesis might lead into a failure of any form of investment plan that has the main objective of beating the market regularly (Moyer, Mcguigan, & Kretlow, 2009; p. 48). As a matter of fact the theory proposes that any transaction cost incurred in the management of portfolio might be more successful for an investor to place his or her money into index funds (Bauwens & Giot, 2001; p. 49). Evidence against the Efficient Market Hypothesis (EMH) There are some anomalies within the market that cannot allow an investor to use the historical prices, private information or public information to obtain abnormal profits. In an actual market of investment, arguments against the Efficiency market hypothesis. Some authors claim that there are investors who have beaten the market and obtained abnormal profits (Graham, Smart & Megginson, 2010; p. 359). A point of focus is especially on the argument that there are sometimes stocks in the market which have been ...Show more

Summary

MARKET EFFICIENCY Name of Institution Forms of Market Efficiency Market efficiency as put forth by Fama (1970; p. 57) proposes that any given moment stock prices totally replicates all the information accessible on a given market or securities…
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