Discussion of the concept of market efficiency and empirical approaches to test for it
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 publicly available information circular of the value of the product information, published in the macroeconomic situation and policy information. Semi-strong-form efficiency implies that neither fundamental analysis nor technical analysis techniques will be able to reliably produce excess returns. And in Strong-form efficienct market , the price of securities reflects not only public information, but also reflects the inside information. As an investor with inside information can not earn excess return.If there are various barriers to make private information become public, as with insider trading laws, then strong-form efficiency is impossible, only if in the case where the laws were universally ignored. In order to test for strong-form efficiency, the market needs to exist where investors can not always earn excess returns over a long period of time. Even if some money managers are consistently observed to beat the market, no refutation even of strong-form efficiency follows: with hundreds of thousands of fund managers universally, even a normal distribution of returns (as efficiency predicts) should be expected to produce a few dozen star class performers. In order to establish an effective market ,the following four conditions are necessay: (1) the effectiveness of information disclosure, which means that all of each financial product information can be released to the public in the market to the fully, truely and timely; (2)the validity of information from the public to be received ,namely ,that the information can be gained by investors who are concerned about the kinds \ financial products fully, accurately and timely; (3) Recipients of information on which to judge the effectiveness of access to information, that every concerns investors of the product can be made based on the information received consistent, reasonable and timely value judgments; (4) the effectiveness of implementation based on the information by the recipient,namely , investors conccerned on...
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