Financial Markets
- Submitted by: tonyb01
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- Category: Science
- Date Submitted: 12/30/2010 04:48 PM
- Pages: 4
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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 information becomes available the better informed the decision-making.
The implication for the investor is that he can rarely outperform the market whether through use of technical or fundamental analysis to achieve greater returns than those that could be obtained by holding a randomly selected portfolio of stocks at with comparable risk because the markets will have already reacted reflecting future developments in commodity prices. This is an important factor of financial markets and underpins market efficiency to the extent that the stability of major world markets relies upon it as a key constituent for building investor confidence and reducing the occurrence of market volatility.
Markets across the world are gaining greater efficiency as a result of improved information technology which allows huge amounts of information of varying degrees of complexities to be captured, disseminating and traded quickly on the markets. However there is a trade-off between time taken to receive the information and to have the information verified such that IT may inadvertently cause markets to be less efficient where price sensitive information is not acted on in a timely basis and thus profit opportunity is lost.
By contrast, Investopedia explains inefficient markets being evidenced...
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 information becomes available the better informed the decision-making.
The implication for the investor is that he can rarely outperform the market whether through use of technical or fundamental analysis to achieve greater returns than those that could be obtained by holding a randomly selected portfolio of stocks at with comparable risk because the markets will have already reacted reflecting future developments in commodity prices. This is an important factor of financial markets and underpins market efficiency to the extent that the stability of major world markets relies upon it as a key constituent for building investor confidence and reducing the occurrence of market volatility.
Markets across the world are gaining greater efficiency as a result of improved information technology which allows huge amounts of information of varying degrees of complexities to be captured, disseminating and traded quickly on the markets. However there is a trade-off between time taken to receive the information and to have the information verified such that IT may inadvertently cause markets to be less efficient where price sensitive information is not acted on in a timely basis and thus profit opportunity is lost.
By contrast, Investopedia explains inefficient markets being evidenced...