Abbey And Efficient Markets Essay

1253 words - 5 pages

Abbey National"An 'efficient' market is defined as a market where there are large numbers of rational, profit-maxi misers actively competing, with each trying to predict future market values of individual stocks, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual stocks already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a stock will be a good estimate of its intrinsic value. (Eugene F. Fama, "Random Walks in Stock Market Prices," Financial Analysts Journal, September/October 1965)There are three distinct forms of market efficiency firstly the soft form efficiency can be described to exist when stock prices reflect past stock prices and all past information thus rendering technical analysis useless as the stocks are at their intrinsic value. Secondly medium form efficiency reflects all publicly available information therefore rendering fundamental analysis techniques worthless. Finally strong form efficiency describes a situation where all information is reflected in the share price and this renders all types of analysis tools of no use even insider dealing cannot out perform the market.Abbey National has been experiencing problems recently due to the collapse of companies such as WorldCom recently as they had invested vast sums in the businesses in terms of long-term debt, which subsequently became huge amounts of bad debts. Since the collapse abbey share price has plummeted dramatically and the company has devised a 3 year re-structuring plan. Abbey national is currently in the second year of the re-structuring plan.Abbey National may be affected by the following external factors:Monetary policy committee interest rate changesHousing market in generalMerger or take over activity in the banking sectorThe aim of the analysis is to prove or disprove the efficient market hypothesis by looking at share price movements and tracing the cause if possible of the change.26th FebruaryAbbey plunged 66p (12.0%) to 484p as the release of second consecutive annual loss, the loss was £686m. The full-year dividend was held at 25p per share. On the basis of the evidence above the FTSE is behaving at medium form efficiency as the information regarding the extent of the loss was known within the Abbey board room therefore insider dealing was possible, the share price plunged after the information was made public conforming to medium form efficiency. The price has fallen as investors have sold the shares.1st marchAbbey announced that it will not be paying a bonus to with profit policy holders, reduced the years' terminal bonus and increased the penalties for investors to exit...

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