Efficient Market Theory
Páginas: 7 (1584 palabras)
Publicado: 22 de enero de 2013
Subject:
EFFICIENT MARKET THEORY
Name:
Sanchez Gonzalez Joao Feliciano
Course:
Investment Portfolio Analysis
Date:
05/04/2010
EFFICIENT MARKET THEORY
Years ago, the efficient market theory was approved by the financial economics. For example in 1970, Eugene Fama published anarticle about “Efficient Capital Market”[1] which describes a market where the price of the assets every time reflects the information available. This article is probably the most read in the financial economics. A lot of people, especially writers consider it like the founder of modern financial theory.
Andrei Shleifer argued that efficient market theory has been the central proposition offinance in the last thirty years[2]. In other words, a market is considered efficient because it suggest that the best index to estimate any value is the price of an asset[3]. Regarding economics papers, we can verify they make their predictions according to several variables in a determinate period of time. All those information help them to predict or estimate what would happen two or three yearslater.
It is important to remember that years ago Samuelson created a similar theory. The only difference is that Eugene Fama changed the name of it. Fama also said that it is impossible to win in the bourse so this makes a fair game. For that reason most said efficient market theory is a review of Samuelson’s. On the other hand, Eugene Fama made a relation between efficiency[4] andmarket. That is why it is very discussed by economists. Fama defines efficiency when prices show all the information but economics define efficient like the optimum allocation of resources.
Fama also wrote several articles and another that took the attention of people was: Actual market prices are, on the basis of all available information, best estimates of intrinsic values. This article tooktheir attention because Eugene said that a market which has these characteristics is called an efficient market.
Louis Bachelier had writen his theory about speculation. At first this theory was rejected. Fortunately, his work was corroborated when studies showed that US stock prices followed a random walk.
Analysts of this model believe if agents try to predict what would happenin the market making a fundamental analysis it will not work. It consists in use real data to evaluate a security's value. Technical analysis is the forecasting of future financial price movements based on an examination of past price movements[5]. For example this analysis does not work when a person wants to predict how the weather will be in the future.
However, they criticize thetheory of efficient market because all market players think they can predict according to past results (past prices). Therefore, it is common to think that prices influence futures prices[6].
Holbrook Working argued it is essential that exist different points of views because this is the only way people in the world can share their thoughts and also dispute about a theory. He also considersthere are two kinds of investors, one who is the intelligent and the other one called inept. This entire traditional model is related with rational expectations established by Lucas and why? There is a simple answer, because to have a perfect market all people should have the access to the information at the same time and the knowledge to use it in the best way. It is based which is based on therational outlook according with the available information. For a better understanding I will mention two or three reasons why is very difficult the access to the information in our country and society.
• It is very difficult and expensive to acquire the information.
• People must decide their expectations very quickly because the information is changing every second.
In sum,...
EFFICIENT MARKET THEORY
Name:
Sanchez Gonzalez Joao Feliciano
Course:
Investment Portfolio Analysis
Date:
05/04/2010
EFFICIENT MARKET THEORY
Years ago, the efficient market theory was approved by the financial economics. For example in 1970, Eugene Fama published anarticle about “Efficient Capital Market”[1] which describes a market where the price of the assets every time reflects the information available. This article is probably the most read in the financial economics. A lot of people, especially writers consider it like the founder of modern financial theory.
Andrei Shleifer argued that efficient market theory has been the central proposition offinance in the last thirty years[2]. In other words, a market is considered efficient because it suggest that the best index to estimate any value is the price of an asset[3]. Regarding economics papers, we can verify they make their predictions according to several variables in a determinate period of time. All those information help them to predict or estimate what would happen two or three yearslater.
It is important to remember that years ago Samuelson created a similar theory. The only difference is that Eugene Fama changed the name of it. Fama also said that it is impossible to win in the bourse so this makes a fair game. For that reason most said efficient market theory is a review of Samuelson’s. On the other hand, Eugene Fama made a relation between efficiency[4] andmarket. That is why it is very discussed by economists. Fama defines efficiency when prices show all the information but economics define efficient like the optimum allocation of resources.
Fama also wrote several articles and another that took the attention of people was: Actual market prices are, on the basis of all available information, best estimates of intrinsic values. This article tooktheir attention because Eugene said that a market which has these characteristics is called an efficient market.
Louis Bachelier had writen his theory about speculation. At first this theory was rejected. Fortunately, his work was corroborated when studies showed that US stock prices followed a random walk.
Analysts of this model believe if agents try to predict what would happenin the market making a fundamental analysis it will not work. It consists in use real data to evaluate a security's value. Technical analysis is the forecasting of future financial price movements based on an examination of past price movements[5]. For example this analysis does not work when a person wants to predict how the weather will be in the future.
However, they criticize thetheory of efficient market because all market players think they can predict according to past results (past prices). Therefore, it is common to think that prices influence futures prices[6].
Holbrook Working argued it is essential that exist different points of views because this is the only way people in the world can share their thoughts and also dispute about a theory. He also considersthere are two kinds of investors, one who is the intelligent and the other one called inept. This entire traditional model is related with rational expectations established by Lucas and why? There is a simple answer, because to have a perfect market all people should have the access to the information at the same time and the knowledge to use it in the best way. It is based which is based on therational outlook according with the available information. For a better understanding I will mention two or three reasons why is very difficult the access to the information in our country and society.
• It is very difficult and expensive to acquire the information.
• People must decide their expectations very quickly because the information is changing every second.
In sum,...
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