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. In particular, returns in January significantly exceed those in other months (January effect) and on Mondays stock prices go down more than on any other day. Observers have noted these effects in many different markets for more than half a century, but without succeeding in giving a completely satisfactory explanation for their persistence. Technical analysis uses most of the anomalies to extract information on future price movements from historical data. But some economists, for example Eugene Fama, argue that most of these patterns occur accidentally, rather than as a result of irrational or inefficient behavior of investors: the huge amount of data available to researchers for analysis allegedly causes the fluctuations. Another school of thought, behavioral finance, attributes non-randomness to investors' cognitive and emotional biases".
Taking an apposite viewpoint Leverton () states, "Without market fundamentals being able to predict prices, the investor is forced to learn new ways of investing.. Ratios and trend analysis are important to picking a winning portfolio. Subscribers to the adaptive expectations theory believe investors are
backward looking in deciding on the correct price to pay for a stock". Realized and expected rreturns from the stock markets have been the subject of intense debate since a long period of time .Several theories suggesting various constructs and factors responsible for determining the returns from the stocks have been postulated thus far.It was not until the late 1960s and early 1970s that a fully-developed, empirically-supported theory of share prices' behavior emerged in the form of the Efficient Markets Hypothesis (EMH).Prior to the development of the EMH , analysts assumed some degree of dependence across successful price changes. Very many efforts were made towards identifying a predictable trading pattern which could be used for chasing profitable deals. From the mid-1950s to the early 1980s, a random walk theory (RWT) of share prices was developed based on the past empirical evidence of randomness in share price movements. RWT
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…
On the other hand, it has been proved that information can highly affect the market performance. In fact, it has been revealed that informational efficiency is one of the three core aspects of market efficiency. The characteristics and the forms of market efficiency are analyzed in this paper.
therefore according to the efficiency market hypothesis, there is no investor who has any form of advantage in foretelling the expected return on the security prices since there is no investor who has access to the public information or private information that is not yet available to any other investor.
For the fulfillment of this aim, the course of the research that has been conducted in this report is directed towards critically appraising the presence of pricing efficiency in the UK stock market with the incorporation of the conclusions, outcomes and findings that have been derived by researchers in prior academic literature on the subject under discussion.
The movement of the stock prices is largely determined by the relative merits and demerits of the information and how it is going to affect the performance of the company which the stocks represent. Just the same way the predictability of the information is impossible as to whether it is good or bad, it is equally impossible to predict the direction in which the stock prices will move in the future based on such information.
This paper studies all aspects of market efficiency and its implications for macroeconomic behavior
When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return but also to outperform, or beat, the market.
orate finance basically relies on the market efficiency, the dynamics of the market and the factors that influence it are of major concern to the corporate governance. The corporate financial strategy involves intricate and integrated methodology of interdependence of various
players in the market are rational and thus all information that may affect the share price is properly reflected in the current price (Bassen 2010, p.21). . However, experts in the field of psychology argue that human beings are not always rational in making their decisions.
(2005). Very often, the banking industry has been noted to be an important stakeholder in financial development. This is a very logical situation to expect, given the fact that the activities of banks are
The author states that factors such as price reflect all the relevant information that is available in terms of the total value of an asset. With the introduction and analysis of the financial efficiency, this paper provides a comprehensive analysis of the market efficiency types and the approaches to test this efficiency.
13 pages (3000 words)Essay
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