Market Efficiency?

What is Market Efficiency?

 An efficient market is one where all information are:
• Transmitted perfectly (everyone receives the information),
• Completely (everyone receives the entire information),
• Instantly (everyone receives the information at once), and
• Costless (everyone receives the information for free).
 Thus, in efficiency security market, market prices of securities reflect all available,
relevant information.
 Therefore, there is no way to "beat" the market (no chance of getting abnormal gain)
because there are no undervalued or overvalued securities available.
 Market efficiency - supported in the efficient market hypothesis (EMH) formulated
by Eugene Fama in 1970.
 Fama was awarded the Nobel Memorial Prize in Economic Sciences jointly with
Robert Shiller and Lars Peter Hansen in 2013.
 EMH suggests that at any given time, prices fully reflect all available information on a
particular stock and/or market.
 Therefore no investor has an advantage in predicting a return on a stock price
because no one has access to information not already available to everyone else.
 Degree of market efficiency
1. Weak form of market efficiency
2. Semi strong form of market efficiency
3. Strong form of market efficiency
Weak form of market efficiency
Hypothesis of weak form are:
4. Past price movements are not useful for predicting future prices because available,
relevant information in past is incorporated into current prices.
5. Future price changes can only be the result of new information becoming available.
Conclusion based on hypothesis:
• Any technical-analysis based rules used for trading or investing decisions should not be
expected to persistently achieve above normal market returns.
• Excess returns might be possible using fundamental analysis.