IQRA University (IU) Efficient Markets
Abstracts"What looks like a small project turns into a big project. What looks like a big project turns into a small project. So I don't think there's been a lot of planning involved. At least in my case, there hasn't been." [Eugene Fama for his work on Efficient Market Hypothesis]The purpose of this report is to study and analyze that how effective "Efficient Market Hypothesis" can be implemented in capital markets.This report describes the basic concept of market efficiency and efficient market hypothesis and their implications.Other parts of report include the, forms of EMH along with their limitation including concept of risk, arbitrage and t ...view middle of the document...
[Andrew W. Loy]This report attains to ascertain the reasoning behind and the implications of the efficient market hypothesis in the world's capital markets.The Efficient Market HypothesisThe efficient market hypothesis (EMH) has implication for investors and for firms.Because information is reflected in prices immediately, investors should only expect to obtain a normal rate of return. Awareness of information when it is released does and investor no good. The price adjusts before the investor has time to trade on it.Firms should expect to receive the fair value for securities that sell. Fair means that the price they receive for the securities they issue is the present value. Thus, valuable financing opportunities that arise from fooling investors are unavailable in the market.[Ross/Westerfield/Jaffe (1999)]This mechanism suggests that the market "prices in" the performance data that is already available about a stock.Definition of Market EfficiencyThe concept of efficiency is one regarding the incorporation of information into security prices, that any available information which could influence a company's stock performance should already be reflected in said company's stock price. In an efficient market, therefore, security prices should equal the security's investment value, where investment value is the discounted value of the security's future cash flows as estimated by knowledgeable and capable analysts. [Reem Heakal]A good description of market efficiency and the underlying mechanics is the one by Cootner (1964):"If any substantial group of buyers thought prices were too low, their buying would force up the prices. The reverse would be true for sellers. Except for appreciation due to earnings retention, the conditional expectation of tomorrow's price, given today's price, is today's price.In such a world, the only price changes that would occur are those that result from new information. Since there is no reason to expect that information to be non-random in appearance, the period-to-period price changes of a stock should be random movements, statistically independent of one another."In a perfect market, these criteria are obviously fulfilled. The sufficient conditions in a market where a) there are no transactions costs, b) all relevant information is costlessly available to all market participants, c) all agree on the implications of current information for the current price and distributions of the future price of each security, the current price of a security should "fully reflect" all available information. [Fama (1970)]Three Forms of Market EfficiencyIn economic and financial theory a distinction is made between three forms of market efficiency. The basis of this separation is what is meant by the term "all available information". Each stronger form of efficiency incorporates all weaker forms of efficiency. [Fama 1970]In weak-form efficient markets stock prices reflect market trading data and information derived from it. Examp...
