Discussion of the concept of market efficiency and empirical approaches to test for it
Discussion of the concept of market efficiency and empirical approaches to test for it
Introduction
This essay will have a brief discussion of the concept of market efficiency and empirical approaches to test for the market efficient, firstly this essay will discuss the source of efficient-market hypothesis and then continue to discuss the three kinds of efficient markets which are weak-form efficient market ,semi-strong-form efficient market ,and strong-form efficient market. Secondly this essay has a review and discussion of the empirical approaches to test for the market efficiency .Finally there is a conclusion and a discussion about the validity of the EMH hypothesis.
I A review of market efficiency
In finance,the efficient-market hypothesis (EMH) asserts that financial markets are informationally efficient. That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made.
There are three major versions of the hypothesis: "weak", "semi-strong", and "strong": one can define a weak-form efficient market in the following sense:consider the arrival in the market of a new piece of information concerning the value of a security.a weakly efficient market is a market in which it may take time to evaluate this information with regard to its implications for the value of the security.once this evaluation is complete,however ,the price of the security immediately adjusts (in an unbiased fashion)to the new value implied by the information.in such a weakly effcient market,the past price series of a security will contain no information not already impounder in the current price.[i]
While, in semi-strong-form effcient market, all publicly available information are assumed to be reflected in product prices, not only include product prices, but also related financial reports and product information, economic conditions and other
Introduction
This essay will have a brief discussion of the concept of market efficiency and empirical approaches to test for the market efficient, firstly this essay will discuss the source of efficient-market hypothesis and then continue to discuss the three kinds of efficient markets which are weak-form efficient market ,semi-strong-form efficient market ,and strong-form efficient market. Secondly this essay has a review and discussion of the empirical approaches to test for the market efficiency .Finally there is a conclusion and a discussion about the validity of the EMH hypothesis.
I A review of market efficiency
In finance,the efficient-market hypothesis (EMH) asserts that financial markets are informationally efficient. That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made.
There are three major versions of the hypothesis: "weak", "semi-strong", and "strong": one can define a weak-form efficient market in the following sense:consider the arrival in the market of a new piece of information concerning the value of a security.a weakly efficient market is a market in which it may take time to evaluate this information with regard to its implications for the value of the security.once this evaluation is complete,however ,the price of the security immediately adjusts (in an unbiased fashion)to the new value implied by the information.in such a weakly effcient market,the past price series of a security will contain no information not already impounder in the current price.[i]
While, in semi-strong-form effcient market, all publicly available information are assumed to be reflected in product prices, not only include product prices, but also related financial reports and product information, economic conditions and other