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Session-7
Efficient Market: Concepts and Forms of Market efficiency
Brodie
Niamh
and
Sophister,
J.
www.tcd.ie/Economics/SER/sql/download.php?key=220
2
Speculative
Bubble,
Irrationality
and
Chaos,
Reilly, Frank. and Brown, Keith, Investment Analysis & Portfolio Management, 7th Edition, Thomson Soth-Western.
Eugene F. Fama (1970) , Efficient Capital Markets: A Review of Theory and Empirical Work, Journal of Finance, Vol. 25, No. 2,
pp. 383417.
the information set involved: (1) weak-form EMH, (2) semi strong-form EMH, and (3)
strong-form EMH.
Weak form of market efficiency: Prices reflect all information contained in past
prices and returns (rules out technical analysis). Assumes that current stock prices
fully reflect all security market information, including the historical sequence of
prices, rates of return, trading volume data, and other market-generated
information, such as odd-lot transactions, block trades, and transactions by
exchange specialists. In other words, the information set t is taken to be solely
the information contained in the past price history of the market as of time t and
past rates of return and other historical market data should have no relationship
with future rates of return.
Strong form of market efficiency: Prices reflect all available information, both
public and private. This means that no group of investors has monopolistic access
to information relevant to the formation of prices. Therefore, no group of
investors should be able to consistently derive above-average risk-adjusted rates
of return. In this case It is taken to be all information known to anyone at time t.
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Additional Readings:
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1. What is Market Efficiency and Conditions of an Efficient Market?
Ans.
Issues in Efficient Market
Markets respond to new information
Possible to distinction for a decision between a profitable and unprofitable
investment given current information
Types of Efficiency: Operational efficiency, Informational efficiency (efficient
market hypothesis)
Conditions of an Efficient Market:
A large number of competing profit-maximizing participants analyze and value
securities, each independently of the others
Active participation in the market
Individuals can not affect the market prices
Information must be free
Free entry and exit by market players must be uninhibited
2. Explain Efficient Market Hypothesis?
Ans.
Efficient Market: The market in which the price for any security effectively
represents the expected net present value of all future profits.Buying or selling the
stock should, on average, return you only a fair measure of return for the
associated risk.
Types of Efficiency: Operational efficiency, Informational efficiency (efficient
market hypothesis)
Conditions of an Efficient Market:
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