Lecture208 - I Stock Market Returns A Lecture 8 Perfect Markets and Efficient Markets A perfect market has competitively determined prices and no

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I. Stock Market Returns A) Perfect Markets and Efficient Markets A perfect market has competitively determined prices and no market frictions. A perfect market is a theoretical benchmark used for comparison. Competitively determined prices imply that there exists a large number of buyers and sellers such that no buyer or sellers exhibits market power. B) Market Efficiency Market efficiency describes how well a market functions. i. Operational Efficiency: the costs of transaction services are minimized. Perfect competition will achieve minimum costs. ii. Pricing Efficiency: extent to which prices reflect available information Categories of pricing efficiency: a. weak efficiency: Price of Security reflects information contained in past price and trading data b. semi-strong efficiency: The security price reflects all past and present available public information. An example of currently available public information is earnings forecasts or the announcement of a stock split or dividend. b. strong efficiency: The security price reflects all information,
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This note was uploaded on 04/12/2008 for the course ECON 435 taught by Professor Chabot during the Winter '08 term at University of Michigan.

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Lecture208 - I Stock Market Returns A Lecture 8 Perfect Markets and Efficient Markets A perfect market has competitively determined prices and no

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