Got a tricky question? Receive an answer from students like you! Try us!

Weak Form Market Efficiency. - Essay Example

Only on StudentShare
Masters
Author : naomie46
Essay
Miscellaneous
Pages 17 (4267 words)

Summary

Information that is contained in the stock market data is considered by a few to be able to guide investors and analysts about the future course the stock markets might take in terms of predicting equity prices and returns…

Extract of sample
Weak Form Market Efficiency.

However finance theory assumes idealistic models for the stock markets and formulates the investor utility functions and expectations accordingly. These models are based on perfect competition and passage of information in an unfettered manner. As Wikipedia (2007) seems to point out, "In economics and financial theory, analysts use random walk techniques to model behavior of asset prices, in particular share prices on stock markets, currency exchange rates and commodity prices. This practice has its basis in the presumption that investors act rationally and without bias, and that at any moment they estimate the value of an asset based on future expectations. Under these conditions, all existing information affects the price, which changes only when new information comes out. By definition, new information appears randomly and influences the asset price randomly.

Empirical studies have demonstrated that prices do not completely follow random walk. Low serial correlations (around 0.05) exist in the short term; and slightly stronger correlations over the longer term. Their sign and the strength depend on a variety of factors, but transaction costs and bid-ask spreads generally make it impossible to earn excess returns. Researchers have found that some of the biggest prices deviations from random walk result from seasonal and temporal patterns. ...
Download paper

Related Essays

STOCK MARKET EFFICIENCY
Generally it is assumed that it is not necessary for everyone in a financial market to be well informed about a security and also that all the participants should have the ability to perceive, analyse and use the information to their advantage. All the efficient market requires is that a few people have the information and based on the information of the few people, the entire market will be well informed. Thus the efficiency of the market is determined purely on the basis of the availability of the information. With this background this paper brings out the determinants of the stock market…
4 pages (1004 words)
Efficiency Market Hypothesis
Efficient markets do exist in theory. For example according to financial theory there are efficient stock markets that especially don't permit market manipulation by investors. However the practical scenario negates this proposition very often. For instance the rally of the stock could be attributed partially to the equity issue and not to the efficiency of the markets.…
8 pages (2008 words)
The Efficient Market Hypothesis
This form of hypothesis shows that it is impossible for an individual to outperform a market by using any type of information that is known in the market except through good luck. The information or news that deals with the Efficient Market Hypothesis states that anything can affect the prices of the traded assets and the effects realized in the future trading period of a company. It has been noted that on average, competition makes the full effect of the new information that consists of intrinsic values to be reflected immediately on the actual prices of the traded assets. The investors in…
14 pages (3514 words)
Stock Market Anomalies
In finance, anomalies are market activities not in agreement with the forecasting of the efficient market hypothesis (EMH). In detail, these anomalies seem to breach premises of mean-variance ratio or no-arbitrage. If a multifarious adaptive scheme approach better depicts markets, the supposed anomalies investigators have keyed out may not be abnormal after all.…
2 pages (502 words)
finance market
RWT basically stated that speculative price changes were independent and identically distributed, so that the past price data had no predictive power for future share price movements. RWT also stated that the distribution of price changes from transaction to transaction had finite variance. In addition, if transactions were fairly uniformly spread across time and were large in numbers, then the Central Limit Theorem suggested that the price changes would be normally distributed. Kendall (1953) calculated the first differences of twenty-two different speculative price series at weekly intervals…
10 pages (2510 words)
Financing Decisions and Market Efficiency
It is therefore important that a company must be innovative and highly efficient in managing its long term and short term financial perspectives in a manner that promotes confidence in its investors and customers.…
6 pages (1506 words)
Stock Market efficiency (Marks and Spencer)
Proponents of the efficient market hypothesis suggest that the market has a large number of players out to maximize profits. Each of these players logically analyzes the market information available so as to make an informed investment decision. This ensures that the market quickly and fairly represents all the available market in the prices of securities.…
8 pages (2008 words)