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What Is An Efficient Market? Essay

898 words - 4 pages

Question 3:
The information efficiency of stock markets is one of widely debated subject matter in the financial management theory and it has been a subject of many scientific studies for the past few decades. There is combination of popularity, controversy and criticism can indicate that an idea of interaction between information and stock market prices is multiple-valued.

What does an efficient market mean? On an absolutely efficient market currant value of security share always equals to investment value (a fair price), which is valuated by a large number of well informed and high professional market analysts.
There are some terms of a “perfect market“. A large number of investors - sellers and buyers, as a result one single transaction does not influence on a market in whole. All information is fully and free available for everyone. A lack of attendant costs such a payment for transactions, taxes or market membership fees. The expectation of all market participants concerning economic indexes and presumable results are the same. There is, however, one remark to above-stated, all of these conditions cannot be implemented in a real market in full: information is not free of charge, taxes and overheads exist, investors can have a different behalf (for example short or long terms strategies).

The basic theory describes the information efficiency of the market is the Efficient Markets Hypothesis (EMH). The information efficiently is classified according to how fast and accurate security prices react to new information, in such a way that nobody be able to get abnormal return. All information can be divided into three types: past information, public available information and all information. In accordance with the Fama’s classification there are three types of the information efficiency: a weak, semi-strong and strong form, depends on type of information, which is immediately and fully reflected in a price.
The weak form efficiency occurs when a current price at any point of time is fully reflected by past prices movement. It means impossibility to beat the market by analysing past prices. Technical Analysis based on past information is useless, because a price has already included it, but many traders take advantage of it. On the other hand, it may be that modern IT-technologies just give possibility any “ordinary” trader to analyse huge amount of incoming information for shorter time and make a profit which up to average. Discrepancy between a currant value and investment value is few and far between for main markets, such the New York and London Stock Exchanges, they always have a trend to balance it. Because of self-regulation the modern stock markets could be referenced to weak form efficiency.
The market is efficient in the semi-strong form when a current price is reflected...

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