Efficient Market Hypothesis Essay

602 WordsMar 19, 20133 Pages
ACCOUNTING THEORY: Efficient Market Hypothesis A financial market is info ally efficient when market prices reflect all available info about value Available info include past prices (weak), all public info (semi strong) and all info including inside info (strong). Prices should reflect all available info- financial transactions at market price using the available info are zero NPV activities. Prices should reflect available info otherwise there would be arbitrage (practice of buying in one place and sell in others) opportunities. There are no transaction costs in trading securities, info is available cost-free to all market participants and agree on the implications of current info for the current price and distributions of future prices for each security. Types of EMH Weak form- future prices cannot be predicted by analyzing price from the past. Excess return cannot be earned in the long run by using investment strategies based on historical prices or data. Security price reflects the info contain in its past prices. Traders earn excess profits. Semi-strong form- implied that share prices reflect all publicly available info in addition to past events and adjust to publicly available new info very rapidly and in an unbiased fashion that such no excess return can be earned by trading on that info. To test, the adjustment to the previously unknown news must be reasonable size and must be instantaneous, consistent upward or downward adjustments after the initial change must be looked for. Strong form- share prices reflect all info, public and private including info that is not publicly available and no one can earn excess returns. If there is legal barriers to private info becoming public as with insider trading laws, strong form efficiency is impossible except the laws are universally ignore. To test, a market need to exist where

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