Efficient market hypothesis
stock price movements
Corporate finance, Lecturer-David Mutlow, 31/10/13 Student no-21185372
2. Fundamental and Technical analysis
3. Efficient market hypothesis
4. Causes of efficient market
5. Empirical evidence
1) The price of the stock is determined by demand and supply. The supply is based on a number of shares issued by a company. Demand is created people who need to buy the shares if demand of the share price increase means that share price is going up so the investors need to pay more for it. If the stock is limited then the investors can only buy from previous owners.so if one person wants the share the other need to prepare to sell. Prices go up until the demand of share price. When the price goes up no one need stocks so it started to fall.
2) When we are going to choose a share we need to look the business and products of a company and also looks at its accounts, Earning per share and prospective dividends. Other factors such as inflation rate, currency level interest rate and consumer demand. Additionally the competitors are examined along with the efficiency of management. This analysis is called as a fundamental analysis this concentrates on the true value of the company. The company accounts reflect the true value of information better than economic information. Concern with the movement of share prices in the past to try to predict the future price, known as a “technical analysis”. The main point here is to identify patterns and to deduce there is likely to be any significant movements. This analysis not concentrates on efficient management .it also known as” Chartism”. Random walk hypothesis, Serial correlation tests, run tests and filters tests are made by investors in the technical analysis.
Fundamental analysis helps the investors to pick the undervalue shares and make abnormal returns.eg-P/E ratio, merger/acquisition. Market efficiency and in efficiency determined by the investors based on the interpret ion information better. The technical analyst main purpose is to find the inefficiency in the market and make abnormal profits. E.g.-January Affect, inefficiency in the market in particular time.
3) The majority of shareholders objective is to earn more returns by investing the right money into the right company. But in the efficient market it is prevent to get more returns by investing, because it reflects all available information. The price of the share change in 3 different ways past (technical analysis), public (reports) and private information. These all information reflects in the efficient market. (fama). Fama explain market efficiency through based on three different form of investment approaches.(Weak,Semi-strong,Strong) efficiency markets.
In weak form efficiency Share prices fully reflect all information contained in past Share prices movements.pt=p(t-1) +expected return +random error, So this based on a technical analysis.it reflect historic cost of the asset, Invest the money based on past price analysis this is based on assumption, Even though fundamental analysis can lead to excess profit in this market
In semi-strong efficiency share price reflect all the relevant, public available information. Market assume that share quickly absorb new information and adjust quickly, the investors Purchase stocks...
Bibliography: A guide to investing in the stock market
The definitive companion to investment and the financial markets (Glen Arnold)
The new finance (Robert A.Haugen)
The efficient market theory and evidence
The efficient market hypothesis and application
Stock Market Efficiency, Insider Dealing and Market Abuse
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