Financial Market Asm

Essay by NellyB April 2014

download word file, 21 pages 0.0

Financial Markets


Prepared by: BUI TRANG NGAN

Student ID: 139126514/1

Submission Date: 6th Jan, 2014



Key characteristics and forms of market efficiency

Market efficiency is a very important concept for a portfolio manager. This concept derived from the Efficient Market Hypothesis (EMH), suggests that the price of a security reflects all the information available about that security (James, 2012).

Although the EMH applies to all types of financial securities, discussions of the theory usually focus on one kind of security, namely, shares of common stock in a company (Jones and Netter, 2008).

To measure exactly the efficiency of a market, there are some factors to evaluate such as: the time for security's price to reflect new information, the bigger the scale of market, the more participants that make it efficiently. In addition, market considered as efficiency when the unexpected information affects to the market and how it reflects on security's price.

Information is anticipated by investors will have no impact to security's price. The last factor affecting market efficiency is the transaction costs and other costs associated with trading and analysis. As long as these costs are high, the markets will be inefficient (James, 2012).

The EMH distinguishes the efficient market based on weak-form, semistrong-form and strong-form

The weak-form states that no investor can expect to earn excess returns based on an investment strategy using such information as historical price or return information. All stock market information, including the record of past stock price changes and stock trading volume, is fully reflected in the current price of a stock (Moyer and Mcguigan et al., 2009, p. 42). Hence, investors cannot predict the changes of future price by using technical analysis. However, fundamental analysis and non-public information can...