Topic : Efficient Mkt Theory & Financing Decision
Efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or property, already reflect all known information.
The efficient-market hypothesis states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck. Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future.
Factor Leading to EMH
• IT (internet) – information is freely available
• Competition for info very stiff due to too many analysis
• Mkt size too large which can’t be manipulated ie true Supply & Demand system prevailing
Limitation of EMH
• Temporal Anomalies - Black Monday (Oct 1987) and generally January stock is higher than the rest of the month due to feel good effect
• Size of the companies – small firms (MC) earn higher returns than large firms after adjustment for systematic risk
• Value vs Growth – Studies shown that PE & BV can used to select stock to produce abnormal return. This is not consistent with Semi-Strong EMH
Different type of Efficiency
• Excess returns cannot be earned by using investment strategies based on historical share prices.
• Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns.
• Share prices exhibit no serial dependencies, meaning that there are no "patterns" to asset prices. This implies that future price movements are determined entirely by unexpected information and therefore are random.
• Semi-strong-form efficiency implies that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by...