Efficient Market Hypothesis Student : 武氏明莊

Market Efficiency and Financial Managers There are many technical analysts in the markets, trying to find best investments on securities by examining past prices, past earnings, track records and other indicators. However security prices are mainly based on investor expectations rather than their analysis. At this point, markets can be thought as efficient, under the condition of all available information is already reflected on security prices.

Efficient Market Hypothesis "An 'efficient' market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants" (Euegene F. Fama1970) Fama's idea formed the entire basis for this hypothesis. His argument was that markets include many qualified and well informed investors who value the securities appropriately and the prices reflect all of the information about state of the companies which issue them. Therefore price levels do not follow any pattern and past experiences cannot be used to predict future prices.

It is clear that no market can attain full efficiency all the time It is clear that no market can attain full efficiency all the time. Changes in the share prices are always possible whether they are caused by newly disclosed information. However; it will take time for investors to take action to this information and for share prices to get their actual value. Following two diagrams illustrates how share prices are responding in the real markets .

There are three forms of the efficient market hypothesis: weak, semi-strong and strong. Each sets different level of relation between the information and security prices. The weak form : This form asserts that price movements are on a random basis and does not depend on the past events. In this form, prices are assumed to follow the "random walk". Therefore it is not possible to predict the future prices by looking at historical share prices. Semi-strong form :This form asserts that any public information about a company is reflected in its share price. This means it is no use to dig into the company reports, announcements or industry trends to find information that would be used to make superior returns. We can anticipate that a market that is efficient in the semi strong form will incorporate the features of the weak form as well.

Strong-form : This advances semi strong form one step further and asserts that even insider information along with the public information is reflected in company shares. This means that investors will not make higher return even if they acquire information such as management decisions or intentions. Thus it can be said that a market that is efficient in the strong form will incorporate the features of the semi-strong form and the weak form together.