What Is An Efficient Market?

Question 3:

The information efficiency of stock markets is one of widely debated subject matter in the financial management theory and it has been a subject of many scientific studies for the past few decades. There is combination of popularity, controversy and criticism can indicate that an idea of interaction between information and stock market prices is multiple-valued.

What does an efficient market mean? On an absolutely efficient market currant value of security share always equals to investment value (a fair price), which is valuated by a large number of well informed and high professional market analysts.

There are some terms of a “perfect market“. A large number of investors - sellers and buyers, as a result one single transaction does not influence on a market in whole. All information is fully and free available for everyone. A lack of attendant costs such a payment for transactions, taxes or market membership fees. The expectation of all market participants concerning economic indexes and presumable results are the same. There is, however, one remark to above-stated, all of these conditions cannot be implemented in a real market in full: information is not free of charge, taxes and overheads exist, investors can have a different behalf (for example short or long terms strategies).

The basic theory describes the information efficiency of the market is the Efficient Markets Hypothesis (EMH). The information efficiently is classified according to how fast and accurate security prices react to new information, in such a way that nobody be able to get abnormal return. All information can be divided into three types: past information, public available information and all information. In accordance with the Fama’s c...

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...iency of the stock markets. Particularly, G. Soros suggests that recent developments on the stock markets have shown the inadequacy of EMH. Also, Warren Buffet who had made his fortune in the crisis of the 70th, early has had the similar point of view to rely on it that the market is not efficient. These opinions deserve attention at least the authors got a practical result - they have earned money.

In conclusion, a stock marker is very complicated “machinery” includes infinitude ever-changing mix of factors. It would be conceitedly to make unambiguous conclusion about the information efficiency when there are too many controversial forcible arguments. However, in spite of the evidence supporting the efficiency, the anomalies that had been detected could be considered contradictory with EMH and these abnormal effects might prejudice the efficient market theory.