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Market efficiency - Essay Example
Finance & Accounting
Pages 7 (1757 words)
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…
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). ...
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