4504c12 - MarketEfficiency Efficient Markets o How well do...

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Market Efficiency Efficient Markets o How well do markets respond to new information? o If the market is efficient, should it be possible to decide between a profitable and unprofitable investment given current information? o Efficient Markets The prices of all securities quickly and fully reflect all available information Current price reflects o Past information o Current information o Information that can be reasonably inferred The market is efficient if investors are unable to earn abnormal profits by using information available The adjustment in prices is unbiased o Adjustment on the average balancing out and correct Conditions for an Efficient Market o Large number of rational, profit-maximizing investors that Actively participate in the market and Individuals cannot affect market prices (price takers) o Information is costless, widely available, generated in a random fashion o Investors react quickly and fully to new information Consequences of Efficient Market o Quick price adjustment in response to the arrival of random information o Prices reflect all available information o Price changes are independent of one another and move in a random fashion Price changes are independent of past price changes because changes are based upon new information which is independent of past information 7/9/11 1
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Market Efficiency Forms o Efficient market hypothesis To what extent do securities markets quickly and fully reflect different available information? o Three levels of Market Efficiency Weak form market level data past price or volume information Semistrong form public information o past information Strong form All public information all (nonpublic) information Weak Form o Prices reflect all past price and volume data Past price changes unrelated to future price changes o Implication for technical analysis, which relies on the past history
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4504c12 - MarketEfficiency Efficient Markets o How well do...

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