Efficient Market Hypothesis

EFFICIENT MARKET HYPOTHESIS: ( My summary for you )

PART: 1

Efficient Market Hypothesis is determined by Eugene Fama in 1970. According to this definition, it is possible to talk about the Efficient Market while reflection of the full information about securities prices is always accessible. The basic premise of the efficient market hypothesis is the random walk model. According to the random walk model, if an efficient market reflects all information in the capital market and all information has been evaluated by investors, at anytime of the current stock price will be equal to the actual value of shareholder value.

The efficient market hypothesis is a kind of approach to contend that fundamental and technical approach is not valid. As a result, Efficient Market Hypothesis shapes the market price of securities as a dynamic knowledge which is shared by all market participants.

Nowadays, capital markets and real markets have become to affect more each other. Therefore the effective functioning of the capital markets has been one of the most debated issues. So it is meant to reflect real values securities which are subject to capital market.

Why is Efficient Market Hypothesis important?

• We need to analysis the form of the market. It means that extent of efficiency.
• We need to be sure prediction of the market correctly.
• We need to explore the trends of the market.
• We need help investors when they make important decisions.

There is a very important significance point of Efficient Market Hypothesis that there is no possibility to use it in a long term period because of balanced risk.

Current market conditions to be an active:

ü  No monopoly on information and data.

ü  Be formed the transaction costs of market as a competitive manner

Assumptions of the efficient market hypothesis:

1)    There are many buyers and sellers in the market. Any buyers or sellers don’t have the power of influence alone to the market.

2)    Securities are related information at a lower cost and they are provided to investors as soon as possible.

3)    In an efficient market, transaction costs are very low.

4)    Institutional structure of the markets is well progressed. Regulatory legislation that is consistent with the operation of markets is provided.

5)    There are no tax-related regulations.

6)    All financial assets are divided completely. The conditions are to be effective in terms of market:

a)There will be no monopoly on information and data

b)    The build up of transaction costs in the market to be in a competitive way

7)    According to this hypothesis, a market which consists of 3 kinds of forms be formed. They are weak, semi-active and Strong (fully active) forms are released.

For more information :

https://en.wikipedia.org/wiki/Efficient-market_hypothesis