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The Efficient Capital Markets Testing: Literature Review

Written By: Tatag Adi Sasono (57.5)

This essay will argue the Fama’s (year) paper of “Efficient Capital Markets: A Review of
Theory and Empirical Work” that the price of securities in the efficient capital markets are
quickly and fully reflects to the availability of market information. To demonstrate this, the
essay will first test the capital markets efficiency model into weak-form test, semi-strong form
test, and strong-form test, ; and then in what stage of efficient capital market in the country
is. Furthermore, it will discuss the role of availability market information has to influence in
on each investor being able to react to the capital markets efficiency, as well as the length of
time it takes for each public company information to contribute to the efficient capital
markets model. Commented [AF1]: While the introduction presents good
and strong argument, some grammatical errors and long
In the beginning, weak-form test indicates that the capital market is efficient because sentence with several ideas make the message unclear.
of the price of securities reflects the past information (Fama, 1970). Correspondingly, the
Commented [AF2]: It is better to have your own words
securities price depends to on the past information and which leads investors to adjust the topic sentence.
strategy using technical analysis. Identically, the investors use the chart and technical
indicators to forecast the securities price including spot the support and resistance level. For
instance, there is a seasonal effect on share prices performance indicates that share prices
would increase at the end year and decrease at the beginning of the year (Novak, 2008). The
role of past information is to mark the behavior of securities price likes the price range of low
to high, the sideways movement, or break the level of support and resistance. Even though Formatted: Highlight
the public companies do not publish the report, the securities price already efficient.
However, the investors are trying to combine the past information and available information Formatted: Highlight
in the market. From that, the weak-form capital market efficiency is rarely happening.
Afterwards, the semi-strong form test shows the availability of publicity in the market Formatted: Highlight
lead to efficiency on the capital markets (Fama, 1970). Not only reflecting the historical of Formatted: Highlight
securities price, in the semi-strong form, the price creates because of the free information in Formatted: Highlight
the market. The information consists of the annual report, financial report, merger and
acquisition report, and additional information as relates with accounting information
(Gersdorff, 2009). The role of available information in the public is to convince the decision
of investment in their portfolio. Most of the investors use fundamental analysis to forecast
the securities price because of the availability of information can be used to assess the risk
and measure the valuation. In addition, the investors use the technical analysis to mark the
support and resistance level. Every investor has the same information of the past and publicly
information. The public companies regularly publish the annual report and other report as
required by the capital market regulator. From that, no one will difficult to get the abnormal
return in the capital markets.
The strong-form market happens as the securities price reflects both public information
and private information (Fama, 1970). As matter of fact, the strong-form capital market is Commented [AF3]: What is the purpose of this sentence
hard to exist because only certain number of investors can get private information from the
owner and management. Although this may be true that strong-form capital market does not Formatted: Highlight
lead investors to get abnormal return in the short period, but in the long-term investors do. Formatted: Highlight
The essential of efficiency in the strong-form capital markets are is low because of the
existence of insider trader. The insider drives the certain group of investors to accumulate the
securities to obtain abnormal return as the securities price reflect the historical information,
publicly information, and private information. The role of private information is powerful
because the investors know the fact of public company’s information directly from the owner
and management. In the reality, the owner and management only want to give the private
information to the big investor and close relationship. Commented [AF4]: Your paper is likely to focus on
explaining Fama’s statement rather than presenting your
Eventually, there are three models of testing to prove the efficient capital markets argument or analysis. Some grammatical issues and long
such as weak-form test, semi-strong form test, and strong-form test. An “efficient” in the sentences make the message difficult to follow
capital market operations when no one, both individual investors and institutional investors
will be able to obtain the abnormal return after adjusted with the risk because of the
availability of market information (Fama, 1991). In respond the efficient capital markets, the Commented [AF5]: I am not sure what is this paragraph
about ? if it is conclusion, it should be developed from your
semi-strong from testing is preferable rather than weak-form and strong-form testing. The own words.
available information in the market are is coming from the past information and public
information. The private information can be accessed only by big investors and close
relationship with the owner and management. The public companies only release the report
that required by the capital market regulator. The efficient price of securities occurs because
of fully reflect to the available markets information and react instantaneously to the new
information. Again, efficient capital market testing only preferable in the semi-strong form. Commented [AF6]: What is the purpose of this section?
This part consists of repetition statements. If it is conclusion
REFERENCES: section, it should present or conclude your own argument
or analyses.
Fama, E. (1970). American Finance Association Efficient Capital Markets : A Review of
Theory and Empirical. The Journal of Finance, 25(2).
Fama, E. (1991). American Finance Association Efficient Capital Markets : II. The Journal of
Finance, 46(5), 1575–1617.
Gersdorff, N. (2009). U.S Mergers and Acquisitions : A Test of Market Efficiency. Journal of
Finance and Accounting, (November), 1–8. Retrieved from
Novak, J. (2008). On the Importance of Accounting Information for Stock Market Efficiency.
Företagsekonomiska Institutionen.
Commented [AF7]: Reference should have detail and
completed information