Market Efficiencies

For decades financial professionals have studied markets to try and discover how to maximise return whilst minimising personal risk. This pursuit has resulted in many different and sometimes conflicting approaches in investing. This is due to both investors’ personal preferences, where they have to prioritise risk, return, liquidity and cash flow, and their views on market efficiency. A person’s view on market efficiency affects both the attitude towards investing and their view of financial markets.

The most common theory is based around the ‘Efficient Markets Hypothesis’ (referred to for the remainder as EMH). There are three types of efficiency described in the EMH, the ...

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piece of real estate etc. are never under or overvalued, and this price is an accurate representation of their worth. This theory has been legitimised and strengthened in numerous empirical studies, showing that share prices tend to fluctuate around a median price in a relatively unpredictable fashion, and respond promptly to publicly available new information. In their market analysis, Busse & Green discovered that market prices respond to insider reports within seconds of initial mention, with positive reports fully incorporated into pricing within one minute. This means that traders who execute within 15 seconds or less from the initial mention to make even small profits (2001, p. 415-416). These ‘windows’ are extremely important in the success of active fund managers.

Whilst this hypothesis has been strongly accepted by many leading financial professionals, there are still many investors attempting to ‘beat’ the market, and in doing so go against the efficient ...

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PAPER DETAILS
Added: 8/30/2018 08:38:35 AM
Submitted By: Samlundiej
Category: Economics
Type: Premium Paper
Words: 888
Pages: 4

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