Financial Markets Essay

889 words - 4 pages

Provide a brief review of the evidence concerning the information efficiency of the world's major stock markets
Efficiency can be described as “the ability to achieve desired result without wasted efforts or energy” (Encarta dictionary, 2009).
In relation to financial markets, the measure of information efficiency can be assessed as being the speed with which security prices quickly and fully reflect all available information. Thus when information arises the news spreads very quickly and the effect is incorporated into the price of securities without delay. Investors are concerned with current or historic information since this influences commodity prices and so it follows that as more ...view middle of the document...

By contrast, Investopedia explains inefficient markets being evidenced where some securities are overpriced and others underpriced, which means investors can made abnormal returns/losses relative to their level of risk. Some investors have turned the gyrations of the financial markets into fortunes for instance Warren Buffet and John M Keynes whilst many other investors end up like Isaac Newton who after losing a bundle of stock exclaimed “I can calculate the motions of the heavenly bodies, but not the madness of people” (Larry MacDonald, 1998)
Evidence would suggest that markets cannot be entirely efficient or inefficient but a mixture seen as a mixture of both since if all participants in the market believed it to be efficient no investor would seek to make abnormal profits.

Secondly, provide a critical assessment as to whether or not the recent volatility in share prices and similar periods of extreme volatility (e.g. during the "dot com bubble") provide evidence of the inefficiency of stock markets in valuing the companies quoted in their exchanges.
The efficient market hypothesis is associated with random walk theory whereby share prices and all subsequent changes represent random departure from previous prices. Thus if information flows unimpeded and is immediately reflected in stock prices then tomorrow’s price will reflect only tomorrow’s news. However news in unpredictable and thus the resulting price changes are unpredictable and random, altering as new information becomes available. Essentially investors have access to all relevant information about a company and will therefore act upon the information in a rational manner.
There are number of influences that trigger price volatility often leading to the markets making egregious mistakes in valuing company shares. Markets are influenced by investor...

Other Essays Like Financial Markets

Mutual Funds Financial Institution and Markets

1985 words - 8 pages Mutual Funds Financial institution and markets Assignment #03 City Campus Section: 01 Date: 29th April 2011 Group Members: Baber Khan Daniyal alvi Deepak Kumar Fahad feroz Rizwan mansoor Objective: It aims to provide a sustainable higher return on an investment compared to market return by adopting various smart investment strategies and by adhering to rules and regulation imposed by the Securities and Exchange

Compare the Efficient Markets Hypothesis with Other Theories of Pricing in Financial Markets

2317 words - 10 pages EFFICIENT MARKETS HYPOTHESIS AND OTHER THEORIES OF PRICING IN FINANCIAL MARKETS Name Course Title/Code Instructor’s Name Date Efficient Markets Hypothesis and other theories of pricing in financial markets Efficient market hypothesis (EMH) is a theory that emerged in the 1960s. It states that it is difficult to predict the market since the price has been set and reflect the current market conditions. It is a disputed and controversial theory

Financial Markets Test

1013 words - 5 pages more liabilities and less capital. The reason behind the structure is that their future cash inflows are more predictable and they can handle future payments due to liabilities since they know the future level of cash inflows. Chapter 18 Bank Regulation 2. In a seminal journal article professor Edward Kane coined the term regulatory dialect. Explain the term as applicable to financial institutions. (5) Explain the

Testbank Chapter1 Financial Market

5931 words - 24 pages Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones) Chapter 1 Introduction Multiple Choice Questions 1 Financial Assets 1) An asset is a possession that has value in an exchange and can be classified as ________. A) financial or intangible. B) financial or variable. C) tangible or intangible. D) fixed or variable. Answer: C Diff: 2 Topic: 1.1 Financial Assets Objective: 1.5: the various ways

Business Paper

519 words - 3 pages Complexities of the U.S Government Alphonzo W Brown Strayer University Fin 100 Professor Lewis Complexities of the U.S Government The U.S. financial system is very complex and it is impacted by several environmental influences, including federal regulations, fluxuation in world markets, and our economy. These factors not only affect the economy, but also businesses and individuals. The U.S. Federal Reserve, the Federal Reserve Chairman

Human Resource

896 words - 4 pages CHAPTER 1 REVIEW MONEY, BANKING AND FINANCIAL MARKETS STEPHEN CECHETTI The Six Parts of a Financial System 1. Money Money is the start of the financial system and the means for making purchases. Accumulating money is a determining factor in defining wealth. Those who store more money are wealthier than those who do not. The consistency of money has a tendency to morph based on changes in the financial system and technology. 2. Financial

Bus520 Chapter 15 & 16

1084 words - 5 pages Objectives 1. Outline the structure and importance of the financial system. 2. List the various types of securities. 3. Define financial market, and distinguish between primary and secondary financial markets. 4. Describe the characteristics of the major stock exchanges. 5. Discuss the organization and functioning of financial institutions. 6. Explain the functions of the Federal Reserve System and the tools it uses to control the

What Is the Role of “Hedge Funds” in the Financial Market?

1067 words - 5 pages other peoples’ money, so regulation had to be introduced. Markets function best when investors use different information and strategies to manage, or hedge against, risk. Private investment companies provide valuable liquidity to financial markets in normal market conditions. In “Hands Off Hedge Funds”, Sebastian Mallaby states that “by buying irrationally cheap assets and selling irrationally expensive ones, they shift market prices until the

Fina Chapter 1

519 words - 3 pages | 1 CORRECT | | Generally, a corporation is owned by its: | | | A) | Managers | | | B) | Board of Directors | | | C) | Shareholders | | | D) | All of the above | | | | 2 CORRECT | | Limited liability is an important feature of: | | | A) | Sole proprietorships | | | B) | Partnerships | | | C) | Corporations | | | D) | All of the above | | | | 3 CORRECT | | Financial markets serve which of

Financial Roles and Terms Paper

1222 words - 5 pages , bought and sold. Primary markets can also be known as an issue market. Companies that issue securities get the cash proceeds in primary markets and use it to fund other operations. Primary markets play an important role in finance because they allow firms to raise capital by way of the sale of financial assets. They also assist in making financial assets more liquid. Liquidity allows companies to raise capital more easily. Secondary market

Usec Inc. Case

965 words - 4 pages ‘impersonal’ discount stores and only shop from local family owned businesses • Difference in financial markets ( Islamic banking customs, depositors do not receive set rate of return, instead get a share in profits and losses. • Differences in corporate governance ( differences in legal framework by which stakeholders exert control over the firm. • Managing the Costs and Risks of Multinational Operations Country risk – the risk that

Related Papers

Financial Markets Essay

541 words - 3 pages Qualitative Analysis In order to gain a better understanding of three-month Canadian Treasury bills, we must take an in-depth analysis of our current economy. By placing an emphasis on various economic indicators, we will be able to determine if investing in these treasury bills is a good financial decision or not. A strong indicator of our economies current financial situation is through evaluating our country’s GDP. Based on the

Buoyant Indian Financial Markets Essay

1073 words - 5 pages Buoyant Indian Financial Markets Despite vanishing FIIs, the Indian markets remain resilient and staying afloat .The US crisis has significantly affected the investor’s sentiments. There will be substantial capital out flows owing to investor’s tendency to with-draw from risky markets. This would lead to liquidity crunch that will, in turn, put pressure on the Indian bourse. Currently the Indian economy is reeling under high

Profits Through Financial Markets Essay

4284 words - 18 pages invest. If acted carefully, there is no reason to accumulate small amounts as sufficient amounts to realize your dreams.It is a long debate to guess future security prices and to make desirably huge profits. These debates started with the born of stock exchanges. Lots of investors trading in stocks are arguing that in the long run, all earnings are equal to zero. In other words, there are no real profits from financial markets. In the long-run, all

The Different Functions Of Financial Markets

814 words - 4 pages Financial Markets Meaning: A financial market is a market for the creation and exchange of financial assets like equity shares , debentures, bonds, treasury bills, commercial papers etc. The financial market helps to link the savers and the between them. Financial markets influence both the quality and the pace economic development through mobilization of savings and their channelisation to productive uses. It is market for creation and